Cross-border clearing and settlement arrangements in the European Union.
Date: 2003-09-08
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: economic policy, financial market, financial transaction, report

ECONOMIC
PAPERS

EUROPEAN COMMISSION
DIRECTORATE-GENERAL FOR ECONOMIC AND FINANCIAL AFFAIRS

http://europa.eu.int/comm/economy_finance

Number 163

February 2002

The Giovannini Group

Cross-border clearing and settlement
arrangements in the European Union
Brussels, November 2001

ECFIN/112/02-EN

This paper only exists in English.

©European Communities, 2002

FOREWORD

The  evolution of  the  European  economy  is  the  result  of  the  interaction  of  markets
and technical progress. On this interaction are superimposed government initiatives
-  which  should  be,  and  are  generally,  aimed  at  reforming  national  institutions
towards greater economic efficiency – as well as co-ordinating initiatives conceived
and  developed  at  the  European  level.  Such  co-ordination  ensures  that  efficiency-
inducing  reforms  at  the  national  level  satisfy  compatibility  criteria  defined  by  the
free movement of goods, services and people within Europe.

In  the  financial  field,  the  most  important  co-ordinating  initiative  has  been  the
process  of  monetary  integration  and  the  elimination  of  national  discretion  in  the
management  of  monetary  policies  and  of  flexible  exchange  rates  within  Europe.
The  initiatives  grouped  under  the  Financial  Services  Action  Plan  are  designed  to
strengthen  the  European  financial  industry,  by  encouraging  both  free  access  and
competition, and the creation of more efficient markets.

The  financial  industry  contributes  to  efficient  allocation  of  capital  and  risk  in  an
economy  and  it  is  a  fundamental  infrastructure  that  permits  other  economic
activities  to  function  and  develop  efficiently.  This  infrastructure  needs  in  turn
another  infrastructure,  both  physical  and  non-physical,  in  order  to  function
properly.  The  latter  includes  financial  market  rules  and  regulations,  a  payments
system, and a system to permit the exchange of financial assets.

In  its  current  project,  the  consultative  group  that  I  chair  was  asked  by  the
European  Commission  to  address  the  most  basic  pillar  of  the  infrastructure  that
supports  financial  markets:  the  system  that  ensures  that  securities  exchanged
within the European economy are properly delivered from the seller to the buyer.

The  findings  reported  here  raise  some  serious  concerns.  Relative  to  domestic
transactions, transactions within the European  economy that occur across Member
Sates are far more complex, are hindered by a number of significant barriers and,
given the data that the group has been able to collect, are much more costly than
domestic transactions. It is perhaps no exaggeration to conclude, from the analysis
in  this  report,  that  inefficiencies  in  clearing  and  settlement  represent  the  most
primitive and thus most important barrier to integrated financial markets in Europe.
The removal of these inefficiencies is a necessary condition for the development of
a large and efficient financial infrastructure in Europe.

This  is  the  first  of  two  reports  on  cross-border  clearing  and  settlement
arrangements  in  the  European  Union  and  focuses  on  identifying  the  sources  of
inefficiency  that  exist  in  the  current  arrangements.  A  second  report  –  to  be
published  in  2002  –  will  be  more  forward  looking  and  will  attempt  to  assess  the
prospects  for  the  EU  clearing  and  settlement  architecture,  with  a  particular
emphasis on public policy aspects.

I  wish  to  express  my  gratitude  to  Pedro  Solbes  and  Fritz  Bolkestein,  who  have
understood very early the crucial importance of efficient securities transactions and
have  allowed  the  formation  of  an  excellent  and  highly  effective  joint  team  from

DG ECFIN  and  DG  MARKT  to  tackle  these  topics.  The  continuous  support  and
encouragement  from  Hervé  Carré  (throughout  the  life  of  the  group)  and  David
Wright  have  been  invaluable.  John  Berrigan  has  been  a  tireless  close  advisor
throughout the project, has co-ordinated the work of all members of the group and
has  skilfully  assembled  the  written  report.  Special  thanks  go  to  Elizabeth  Wrigley
and also to Lars Boman and Delphine Sallard, who have made major contributions
in preparing the report.

I  would  emphasise,  however,  that  the  views  presented  in  the  report  are  solely
those  of  the  financial-market  experts  who  have  participated  in  the  Group’s
discussions.  All  Group  members  have  offered  practical  advice  and  support  in  the
analysis and preparation of this report. Among them, I wish to express my special
thanks to Martin Thomas, Mattias Levin, Godfried De Vidts and Daniela Russo.

Alberto Giovannini
Chairman

TABLE OF CONTENTS

Executive Summary

Section 1:      Introduction

Section 2:
                    Transactions

Clearing and settlement of securities

Section 3:

Overview of the EU clearing and settlement
infrastructure

Section 4:      Cost of clearing and settling cross-border
                     securities transactions

Section 5:
                    Settlement

Barriers to efficient cross-border clearing and

Annexes

Annex I:
                     discussions on report

List of participants in Giovannini Group

Annex II:

Mandate for working groups on EU
cross-border clearing and settlement

Annex III:

An Alternative Perspective on the Cost
Structure of Cross-Border Settlement in

                     the European Union

Annex IV:

Questionnaire on cross-border clearing and

                               settlement in the European Union

Annex V: 

Respondents to the questionnaire on EU
cross-border clearing and settlement
arrangements

Annex VI:

Summary of responses to questionnaire
on EU cross-border clearing and settlement
arrangements

Page

i

1

4

20

36

44

62

64

66

68

81

82

    
EXECUTIVE SUMMARY

__________

This  report  is  the  first  of  two  dealing  with  the  clearing  and  settlement  of  cross-
border – or more accurately cross-system - securities transactions in the European
Union.  The  objectives  of  the  report  are  to  assess  the  current  arrangements  for
cross-border clearing and settlement and to identify the main sources of inefficiency
relative  to  the  corresponding  arrangements  for  domestic  transactions.  A  second
report, which will be published in mid-2002, will examine the prospects for the  EU
clearing  and  settlement  infrastructure, with  particular  emphasis  on  public-policy
aspects.

The  clearing  and  settlement  process  is  an  essential  feature  of  a  smoothly
functioning  securities  market,  providing  for  the  efficient  and  safe  transfer  of
ownership from the seller to the buyer. The process involves four main steps, which
are  confirmation  of  the  terms  of  the  securities  trade,  clearance  of  the  trade  by
which the respective obligations of the buyer and seller are established, delivery of
the  securities  from  the  seller  to  the  buyer  and  the  reciprocal  payment  of  funds.
When  both  delivery  and  payment  are  finalised,  settlement  of  the  securities
transaction  has  been  achieved.  Clearing  and  settlement  of  a  securities  transaction
can involve intermediaries in addition to the buyer and seller and the complexity of
the  process  is  directly  related  to  the  number  of  actors  involved.  Accordingly,  the
greater role played by intermediaries makes the clearing and settlement of a cross-
border transaction inherently more complicated than the corresponding process for
a domestic transaction

Cross-border  clearing  and  settlement  requires  access  to  systems  in  different
countries  and/or  the  interaction  of  different  settlement  systems.  Investors  rarely
access  a  foreign  system  directly  and  typically  need  to  use  intermediaries  to  this
end. Three main intermediaries are available, i.e. a local agent (which is typically a
member of the foreign CSD concerned), an international CSD or a global custodian
(both  of  which  provide  the  international  investor  with  a  single  access  point  to
national CSDs in various countries via direct membership of the relevant CSD or via
a network of sub-custodians in the countries concerned). Less often, investors use
links  between  their  local  CSD  and  the  foreign  CSD.  The  use  of  intermediaries  in
interacting  with  different  systems  increases  the  risk  and  cost  for  the  cross-border
investor  and  this  cost  rises  with  the  number  of  different  clearing  and  settlement
systems that must be accessed.

Investor  demand  for  foreign  securities  has  increased  sharply  within  the  European
Union since the introduction of the euro. However, the EU infrastructure for clearing
and  settling  cross-border  transactions  remains  highly  fragmented.  Although  the
infrastructure is consolidating, there  remain across the Union a very large number
of entities (e.g. 19 CSDs and 2 ICSDs) whose primary business is to play a role in
clearing and settlement. In consequence, the pan-EU investor is required to access
many national systems that provide very different types of services, have different
technical requirements/market practices, and operate within different tax and legal
frameworks.  The  additional  cost  that 
fragmented
infrastructure represents a major limitation on the scope for cross-border securities
trading in the Union.

is  associated  with  this 

Three  types  of  additional  cost  can  be  identified  in  cross-border  clearing  and
settlement.  These  are  direct  costs  in  the  form  of  higher  fees  for  the  services
provided,  indirect  costs  in  the  form  of  extra  back-office  facilities  that  must  be
maintained or bought in from an intermediary and opportunity costs in the form of

i

inefficient  use  of  collateral,  a  higher  incidence  of  failed  trades  and  trades  that  are
simply foregone because of the difficulties involved in post-trade processing across
borders. For reasons  of feasibility, the analysis in this report has been  confined  to
the  direct  costs,  although  there  is  evidence  to  suggest  that  these  constitute  a
relatively minor share of total.

A  valid  comparison  of  the  clearing  and  settlement  fees  for  cross-border  and
domestic  securities  transactions  is  precluded  by  the  fact  that  the  nature  of  the
service provided varies from one provider to another. An alternative approach used
in  this  report  focuses  on  the  per-transaction  income  of  providers  as  a  proxy  for
fees.  The  analysis  reveals  that  the  per-transaction  income  of  the  ICSDs,  which
process  predominantly  cross-border  trades,  is  very  much  higher  (about  11  times)
than  the  per-transaction  income  of  national  CSDs,  which  process  mainly  domestic
transactions.  The  extent  of  fragmentation  in  the  EU  clearing  and  settlement
infrastructure  means  that  the  ICSDs  (and  presumably  global  custodians  which
similarly  focus  on  cross-border  transactions)  must  operate  in  a  complex
environment of multiple markets. While allowance must be made for issues of data
comparability, it is difficult to avoid the conclusion that the cost differential between
ICSDs  and  the  national  CSDs  reflects  the  existence  of  barriers  to  efficient  cross-
border clearing and settlement within a fragmented EU infrastructure.

The Group has identified and listed 15 barriers to efficient cross-border clearing and
settlement.  The  barriers  have  been  categorised  under  the  three  headings  of
national  differences  in  technical  requirements/market  practice  (10),  national
differences  in  tax  procedures  (2),  and  issues  relating  to  legal  certainty  (3).  In
considering  the  scope  to  remove  these  barriers,  a  distinction  is  made  between
those  that  can  be  addressed  by  the  private  sector  alone  and  those  that  can  be
addressed only on the basis of government intervention. In this context, there is a
consensus within the Group that the EU clearing and settlement landscape could be
significantly improved by market-led convergence in technical requirements/market
practice  across  national  systems.  This  would  provide  for  inter-operability  between
national  systems  and  could  deliver  considerable  benefits  within  a  significantly
shorter  timeframe  than  that  required  for  full  system  mergers.  On  the  other  hand,
the  removal  of  barriers  related  to  taxation  and  legal  certainty  is  clearly  the
responsibility  of  the  public  sector.  Although  many  tax-related  barriers  would  lose
relevance if investors were free to hold their securities within their chosen taxation
regime,  there  remains  a  convincing  argument  in  favour  of  harmonising  the
procedures for securities taxation as a further means to facilitate the integration of
EU  financial  markets.  Barriers  related  to  legal  certainty  reflect  more  fundamental
differences  in  the  concepts  of  underlying  national  laws  and  would  appear  more
difficult  to  remove  than  barriers  in  the  other  categories.  Nevertheless,  a  partial
solution  seems  to  be  available  in  the  proposed  EU  Directive  on  collateral
management,  which  is  reflected  by  work  currently  underway  at  the  Hague
conference on private international law.

In  conclusion,  it  is  clear  that  fragmentation  in  the  EU  clearing  and  settlement
infrastructure  complicates  significantly  the  post-trade  processing  of  cross-border
securities  transactions  relative  to  domestic  transactions.  Complications  arise
because  of  the  need  to  access  many  national  systems,  whereby  differences  in
technical  requirements/market  practices,  tax  regimes  and  legal  systems  act  as
effective  barriers  to  the  efficient  delivery  of  clearing  and  settlement  services.  The
extent  of  the  inefficiency  that  is  created  by  these  barriers  is  reflected  in  higher
costs to pan-EU investors and is inconsistent with the objective of creating a truly
integrated EU financial system. A list of such barriers is provided in this report and
urgent action is now required to remove them.

ii

The Giovannini Group
advises the Commission
on financial-market
issues.

The Group has
produced reports on the
re-denomination of
bond markets into euro,
the EU repo market and
co-ordinated issuance
of euro-area
government bonds.

The Group is now
examining EU clearing
and settlement
arrangements in the
context of completing
the Internal Market for
financial services and
ensuring the efficient
functioning of the euro-
denominated financial
markets.

Section 1: Introduction
________

The Giovannini Group was formed in 1996 to advise the Commission on
issues  relating  to  EU  financial  integration  and  the  efficiency  of  euro-
denominated  financial  markets.  The  Group  consists  of  financial-market
participants  and  meets  under  the  chairmanship  of  Dr.  Alberto
Giovannini.  The  Commission’s  Directorate-General  for  Economic  and
Financial  Affairs  provides  the  secretariat,  with  officials  from  the
Directorate-General  for  the  Internal  Market  and  from  the  European
Central Bank (ECB) also supporting the Group's work.

The Group has produced three previous reports. The first report (1997)
considered  the  likely  impact  of  the  introduction  of  the  euro  on  capital
markets1; it helped to forge a common approach to the re-denomination
of  public  debt  in  euro  and  in  establishing  common  bond-market
conventions for the euro-area. The second report (1999) focused on the
EU  repo  market,  addressing  problems  related  to  national  differences  in
infrastructure,  market  practices  and  legal/fiscal  frameworks.2  The  third
report (2000)  examined the  scope for improving  the  efficiency  of  euro-
denominated government bond markets by means of more co-ordinated
issuance among the euro-area Member States.3

This  fourth  report4  focuses  on  the  current  situation  and  prospects  for
cross-border clearing and  settlement  arrangements  in  the  EU  securities
markets. Although the clearing and settlement processes are among the
less  familiar  features  of  any  financial  system,  they  are  essential  to  the
safe and efficient functioning of securities markets. Within the European
Union, the importance of these processes in a cross-border context has
grown  in  line  with  the  emergence  a  more  integrated  and  securitised
financial  system  since  the  launch  of  EMU.  The  topic  is,  therefore,
relevant  to  the  Group's  mandate  in  relation  to  completing  the  Internal
Market  for  financial  services  and  to  ensuring  the  smooth  functioning  of
the euro-denominated financial markets. More specifically, the Report of
the  Lamfalussy  Committee5  has  underlined  the  role  of  efficient  clearing
and  settlement  arrangements  in  delivering  the  economic  benefits  from
the  broader  process  of  EU  financial  integration.  The  Committee  argues
that further restructuring of EU clearing and settlement arrangements is
necessary, stressing that "the process of consolidation should largely be
in  the  hands  of  the  private  sector".  However,  the  Committee  also
highlights  the  public  policy  interest  in  having  the  most  cost-efficient,
competitive and prudentially sound arrangements possible.

Clearing and settlement issues have been examined extensively in other
fora,  notably  the  Bank  for  International  Settlements  (BIS)  with  the
Committee  on  Payment  and  Settlement  Systems  (CPSS)  currently

1 “The Impact of the Introduction of the Euro on Capital Markets”, A Communication from
the Commission – COM(97) 337 of July 1997.
2 “EU Repo Markets: Opportunities for Change”, October 1999.
3 “Co-ordinated Public Debt Issuance in the Euro Area”, November 2000.
4 See Annex I for a full list of participants in the Group’s work in preparing this report.
5 See “Final Report of the Committee of Wise Men on the Regulation of European
Securities Markets” (February 2001).

1

recommendations 

in  conjunction  with 

preparing  a  set  of 
the
International  Organisation  of  Securities  Commissions  (IOSCO).  The
Group  of  Thirty  (G30)  and  the  International  Securities  Services
Association (ISSA) are also active in this area. Much of the work in these
fora  has  focused  on  global  clearing  and  settlement  arrangements  from
the perspectives of efficiency, systemic risk and central-bank oversight.
While  drawing  on  this  work,  the  Giovannini  Group  is  focusing  more
narrowly  on  clearing  and  settlement  in  the  European  Union  and
particularly  on  identifying  those  factors  that  may  hinder  the  efficient
provision of these services between the Member States.6 In this context,
the objective of the Group's work is to inform the ongoing debate by:

•

•

•

reviewing the current arrangements for cross-border clearing and
settlement in the EU markets for fixed-income securities, equities
and derivatives;

considering  the  requirements  against  which  the  efficiency  of
possible alternative arrangements can be assessed; and

identifying  some  of  the  possible  future  arrangements  for  the
provision of clearing and settlement services in these markets.

Direct input to the Group's work has come from several sources. Three
working  groups,  representing  the  main  users  of  cross-border  clearing
and  settlement  services,  were  set  up  to  focus  on  developments  and
prospects  in  each  of  the  three  markets  under  consideration.  Market
participants have responded to an Internet-based questionnaire focusing
primarily on potential obstacles to cross-border clearing and settlement
and  drivers  for  change  to  current  arrangements.7  Several  of  the  main
suppliers  of  clearing  and  settlement  services  have  made  formal
submissions  to  the  Group.8  The  Centre  for  Economic  Policy  Studies
(CEPS)  provided  the  basis  for  the  an  analysis  of  the  costs  of  cross-
border  clearing  and  settlement  services  relative  to  the  costs  of
corresponding  services  for  domestic  transactions.9    Finally,  there  have
been useful consultations with the G30, which is once again working on
global  clearing  and  settlement  arrangements  with  a  specific  focus  on
Europe.

Unlike work in other
fora, this report focuses
on EU clearing and
settlement arrangements
only, and on the
obstacles to the efficient
provision of these
services for cross-border
securities transactions.

Direct input to the
Group's work has
come from a range of
sources.

The Giovannini Group's work on EU cross-border clearing and settlement
arrangements will be in the form of two reports. This report will review
the  current  arrangements,  highlighting  the  main  inefficiencies  in  terms
of  national  differences  in  technical  requirements/market  practices,
taxation and the legal treatment of securities. The intention is to identify
clearly  the  sources  of  these  inefficiencies,  assess  their  justification  and
consider  the  scope  for  their  removal.  In  a  follow-up  report,  the  Group
will  examine  issues  relating  to  the  future  infrastructure  for  providing
cross-border clearing and settlement services within the Union.

A follow-up report
will examine issues
relating to the future
infrastructure for
clearing and
settlement in the EU.

6 See full mandate for the Group's work on EU clearing and settlement in Annex II.
7 See copy of questionnaire in Annex IV.
8 Members of the Giovannini Group met with representatives of clearing and settlement
providers at the premises of the ECB on 28 May 2001.
9 These cost calculations are presented in Section 4 and were made in the context of a
forthcoming CEPS study on EU settlement arrangements to be published independently of
this report.

2

This  report  is  structured  as  follows.  Section  2  presents  a  simplified
description  of  the  clearing  and  settlement  process,  examines  the  main
channels for availing of these services across borders and considers the
extent  to  which  credit  risk  for  the  investor  is  increased  in  processing
cross-border  transactions.  In  Section  3,  the  institutional  arrangements
for trading, clearance and settlement of securities and derivatives in the
Union are briefly described. Section 4 analyses the costs of clearing and
settlement  in  the  Union,  highlighting  the  additional  costs  relating  to
cross-border  transactions.  Section 5  identifies  the  obstacles  to  efficient
cross-border  clearing  and  settlement  in  the  Union,  assesses  their
justification and, where appropriate, recommends that they be removed.

3

Section 2: Clearing and settlement
 of securities transactions 10
________

I. 

Functionalities 
settlement

in  the  process  of  clearing  and

The  clearing  and  settlement  processes  are  essential  features  of  a
smoothly  functioning  securities  market.  As  is  the  case  for  any  market,
the  trading  of  securities  involves  the  transfer  of  ownership  from  the
seller  to  the  buyer  of  the  relevant  instruments  as  well  as  a  reciprocal
transfer  of  funds  in  payment.  Clearing  and  settlement  are  the  services
that  allow  these  transfers  to  be  made  on  an  efficient  and  safe  basis.
Clearing  and  settlement  can  be  achieved  in  different  ways  and  can
involve  several  intermediaries  in  addition  to  the  buyer  and  seller.  The
complexity of a securities transaction, i.e. the complexity of the clearing
and  settlement  processes,  is  directly  related  to  the  number  of  actors
involved. In this context, it is worth noting that a cross-border securities
transaction  normally  involves  a  greater  number  of  participants  than  a
domestic transaction.

The  process  of  clearing  and  settlement  begins  when  a  securities  trade
has  been  executed.  A  series  of  steps  and  actions  are  involved  in  the
process of completing the transfer of ownership of the  security and the
corresponding payment. For the purposes of exposition, the clearing and
settlement  procedure  can  be  described  in  terms  of  four  main  activities
(see also Chart 2.1):

• Confirmation  of  the  terms  of  the  trade  as  agreed  between  the

buyer and seller;

• Clearance, by which the respective obligations of the buyer and

seller are established;

• Delivery,  requiring  the  transfer  of  the  securities  from  the  seller

to the buyer; and

• Payment,  requiring  the  transfer  of  funds  from  the  buyer  to  the

seller.

Delivery  of  securities  and  payment  of  funds  may  occur  simultaneously
but  only  when  both  delivery  and  payment  have  been  finalised  is
settlement of the securities transaction achieved.

10 The description of clearing and settlement functionalities in this section draws heavily on
work by other institutions and bodies, notably within the BIS. For a more complete
description of the clearing and settlement process – as well as specific cross-border features
– see “Cross-Border Securities Settlements” – Report prepared by the CPSS of the central
banks of the G10 (March 1995) and “ Recommendations for Securities Settlement
Systems” – Report of the CPSS-IOSCO Joint Task Force on Securities Settlement Systems
(January 2001).

4

The clearing and
settlement process
provides for the
efficient and safe
transfer of ownership
and payment between
buyers and sellers in
securities markets.

Four main activities in
the post-trade
processing of a
securities transaction
can be identified, i.e.
confirmation, clearance,
delivery and payment.

Confirmation

Confirmation  of  the  terms  of  a  securities  transaction  takes  place  via  a
number  of  mechanisms,  usually  determined  by  the  location  of  the
original trade.  OTC transactions are typically confirmed directly between
the  buyer  and  seller  by  electronic  means,  by  telefax,  or  by  specialised
messaging  service.  Some 
trading  systems  provide  automatic
confirmation,  while  other  securities  exchanges  or  clearing  agents
produce  confirmations  based  on  data  submitted  by  counterparties.
Efforts  are  underway  to  reduce  the  complexity  of  confirmation  and
minimise  the  possibility  of  errors  by  streamlining  procedures  so  as  to
limit the number of times information on the terms of the trade must be
transmitted between the various participants.

The terms of a
securities transaction
can be confirmed
either directly between
the buyer and seller or
indirectly through the
securities exchange or
a clearing agent.

Clearance

Once  the  terms  of  a  securities  transaction  have  been  confirmed,  the
respective  obligations  of  the  buyer  and  seller  are  established  and
agreed. This process is known as clearance and determines exactly what
the counterparties to the trade expect to receive. Clearance is a service
normally  provided  by  a  clearinghouse,  a  central  securities  depository
(CSD) or an international central securities depository (ICSD). The latter
two also hold securities and allow them to be processed by book entry.
Clearance can be carried out on a gross or net basis. When clearance is
carried out on a gross basis, the respective obligations of the buyer and
seller  are  calculated  individually  on  a  trade-by-trade  basis.  When
clearance  is  carried  out  on  a  net  basis,  the  mutual  obligations  of  the
buyer  and seller are  offset yielding a  single  obligation  between  the  two
counterparties.  Accordingly,  clearance  on  a  net  basis 
reduces
substantially the number of securities/payment transfers that require to
be  made  between  the  buyer  and  seller  and  limits  the  credit-risk
exposure  of  both  counterparties.  Clearance  can  also  be  continuous
(typically  when  settlement  of  a  transaction  is  on  a  gross  basis)  or
discrete (typically when settlement is on a net basis).

Securities  markets  may  avail  of  a  central  counterparty  (CCP),  which  is
an entity that interposes itself legally between the buyers and sellers of
securities  by  a  process  of  "novation".  In  consequence,  the  buyers  and
sellers  of  securities  interact  directly  with  the  CCP  and  remain
anonymous  to  each  other.  Some  CCPs  also  offer  a  netting  facility,
whereby  the  CCP  offsets  all  obligations  i.e.  amounts  owed  by  and  to
participants  in  the  market  and  reduces  all  outstanding  residuals  to  a
single  debit/credit  between  itself  and  each  member  (rather  than  a
multiplicity  of  bilateral  exposures  between  members).  This  further
facilitates  the  management  of  securities  and  payments  transfers  and
reduces  the  credit  risk  exposure,  margin  requirements  and  liquidity
needs of buyers and sellers.

Settlement

Settlement  of  a  securities  transaction  involves  the  delivery  of  the
securities and the payment of funds  between  the  buyer  and  seller.  The
payment  of  funds  can  be  effected  in  the  settlement  system  or,  more

5

Clearance of a
securities transaction
establishes the
respective obligations
of the buyer and seller
and may be achieved
on either a gross or net
basis.

Securities markets may
avail of a central
counterparty (CCP),
which is an entity that
interposes itself legally
between the buyers and
sellers of securities.

usually,  via  a  banking/payments  system.  The  delivery  of  securities  is
typically carried out in a CSD or an ICSD. In the EU, the vast majority of
securities  are  immobilised  or  dematerialised  and  can  be  transferred  by
means  of  book-entries  (rather  than  by  the  physical  movement  of  the
securities between buyer and seller). A trade cannot be declared settled
until  both  transfers  are  final  (i.e.  cannot  be  rescinded).  Settlement
procedures  that  only  allow  securities  to  be  transferred  to  the  buyer  on
condition of payment being received by the seller are known as 'Delivery
versus  Payment'  (DVP).  Often,  settlement  finality  can  be  assured  only
after  the  transfer  of  securities  ownership  from  the  seller  to  the  buyer
has  been  formally  registered.  Many  CSDs  offer  registration  as  an
additional service.

intermediary 

through  an 

The  immobilised  or  dematerialised  securities  involved  in  a  transaction
would  typically  be  held  by  a  CSD.  The  owners  of  a  security  will  not
necessarily  be  a  member  of  a  CSD  and  may  interact  with  the  CSD
is  a  member.  These
indirectly 
intermediaries  or  custodians  hold  securities  on  behalf  of  owners  and
often provide services ranging from monitoring of dividend receipts and
interest  payments  to  the  management  of  corporate  actions.  One  by-
product  of  cross-border  trading  has  been  the  emergence  of  global
custodians,  intermediaries  in  which  investors  centralise  holdings  of
securities  that  have  been  issued  in  many  different  countries.  These
global custodians are typically members of many national CSDs or have
access to membership via local sub-custodians.

that 

A securities transaction
is settled when the
securities are delivered
to the buyer and the
seller has received the
reciprocal payment of
funds.

Securities are typically
held in a CSD and
managed, on behalf of
their clients, by
intermediaries that are
members of the relevant
CSD.

Chart 2.1:

Clearing and Settlement
of a Securities Trade

Confirmation

Clearance

Payment

Delivery

Settlement

6

II.

Specific 
settlement

features  of  cross-border  clearing  and

A  “cross-border  securities  transaction”  involves  market  participants
buying  and  selling  securities  on  non-domestic  markets  and/or
undertaking  transactions  with  counterparties  in  other  countries.  Such
transactions result in a need to receive and deliver securities located in
different  countries  and  to  make  and  receive  the  related  payments.  The
expanding volume of cross-border securities transactions in recent years
can  be  attributed  to  several  factors.  In  a  global  context,  these  factors
include  technological  advancement,  the  growth  in  size  of  financial
markets as international capital movements have been liberalised and as
financial deregulation has resulted in a wider range of financial products
and  services.  In  an  EU-specific  context,  cross-border  securities
transactions  have  been  further  stimulated  by  the  introduction  of  the
euro  which  brought  about  more  liquidity  by  pooling  markets  at  least
along some dimensions (e.g. currency risk, central bank money), and by
continued efforts to complete the Internal Market for financial services.

In  general,  the  clearing  and  the  settlement  of  a  cross-border  securities
transaction  raise  similar  issues.  However,  a  specific  issue  related  to
clearing  can  arise  when  there  is  cross-border  use  of  a  central
counterparty. If a transaction is novated to a central counterparty, then
the  two  parties  to  the  transaction  must  be  members  of  the
clearinghouse involved or be able to operate through a general clearing
member.  They  must  be  able  to  deliver  to  and  receive  from  the
clearinghouse  involved  the  necessary  securities  and  cash.  This  implies
that  both  the  participant  and  the  clearinghouse  must  have  access
(directly  or  indirectly)  to  the  relevant  systems.  In  practice  a  CCP  can
only  offer  novation  of  transactions  involving  securities  to  be  settled  in
the CSDs where the  relevant links are in place. For  example, Brokertec
offers central counterparty functionality for a variety of European bonds
settled  in  systems  to  which  LCH  has  membership  or  access.  The  other
main  alternative  bond  trading  system,  MTS,  is  currently  examining  the
scope for providing such a functionality also.

Channels for cross-border settlement

In  order  to  settle  a  transaction  in  a  particular  security,  both
counterparties  must  have  access  to  systems  where  it  is  possible  to
deliver  and  receive  that  security.  In  domestic  markets,  this  is  quite
simple  –  the  security  is  issued  into  a  particular  CSD  and  market
participants have direct or indirect access to that system for settlement.
In  a  cross-border  context,  the  counterparties  are  located  in  different
countries  and  one  or  both  may  be  located  in  a  different  country  to  the
one  where  the  security  is  issued  or  is  deposited.  Thus,  the  distinctive
feature of a cross-border settlement relative to a domestic settlement is
that it involves gaining access to a settlement system in another country
and/or 
systems.  The
complications  that  arise  in  this  context  are  an  important  source  of
additional cost and risk for investors.

interaction  of  different 

settlement 

the 

A cross-border
securities transaction
involves market
participants buying and
selling securities on
non-domestic markets
and/or undertaking
transactions with
counterparties in other
countries.

The clearing and the
settlement of a cross-
border securities
transaction raise similar
issues, although use of a
CCP raises some
specific issues.

The distinctive feature
of settling a cross-
border transaction is
that it involves gaining
access to systems in
other countries and/or
the interaction of
different settlement
systems.

7

Chart 2.2 Channels for Cross-Border Settlement

International Investor

ICSD

Global
Custodian

Home Country
CSD

Local Agent

Local CSD

In settling a cross-border securities transaction, the counterparties have
five options (see Chart 2.2 above). These are:

Settlement of a cross-
border transaction can
be achieved by…

•

•

to have direct access to a national CSD in the country where the
security is issued. Direct access implies participation/membership in
legal  agreements,
the  national  CSD,  which 
complying with membership requirements, investing in technological
interfaces  and  access  to  a  payment  mechanism.  Non-resident
institutional traders will often establish local branches or subsidiaries
to acquire direct access. Surveys carried out by the BIS in the mid-
1990s  have  indicated  that  the  option  of  direct  access  is  not  widely
used.

involves  signing 

to  avail  of  the  services  of  a  local  agent,  which  is  normally  a
financial  institution  with  membership  of  the  national  CSD  in  the
country  where  the  security  is  issued.  This  is  the  most  common
option used for cross-border settlement of equities transactions. For
bonds, ICSDs are more extensively used in cross-border settlement.
The  local  agent  offers  the  non-resident  a  full  range  of  settlement,
banking  and  custody  services,  as  well  as  services  for  tax  purposes,
processing  of  corporate  actions  etc.  The  range  of  services  provided
by  the  local  agent  is  determined  on  a  contractual  basis  and  will
normally  involve  substantial  communication  with  the  non-resident
investor  relating  to  the  settlement  process.  Local  agents  with  a
sufficiently  large  customer  base  may  even  settle  trades  between
customers internally. Local agents can also offer this service to CSDs
or ICSDs (so-called indirect links).

…direct access to a
national CSD…

…use of a local agent…

8

•

•

•

to  use  ICSDs,  which  were  originally  established  to  settle  for  the
Eurobond  market  but  have  broadened  their  range  of  activities
substantially  over  time.11  ICSDs  still  operate  mainly 
in  the
settlement  of  internationally-traded  fixed  income  instruments  but
offer  a  single  access  point  to  national  markets  via  links  to  many
national CSDs. These links are either direct or through local agents.
The  ICSDs  have  a  broad  customer  base  made  up  of  all  the  main
players in these cross-border markets, which enables transactions to
be  settled  between  them  internally  within  the  ICSDs.  This  facility  is
enhanced  by  the  provision  of  intra-day  securities  lending,  which
facilitates  the  settlement  of  back-to-back  trades  without  the
additional  costs  associated  with  pre-positioning  securities  or
accepting the delayed availability of securities.12

…use of an ICSD…

to  use  a  global  custodian,  which  also  provides  customers  with  a
single  access  point  to  national  CSDs  in  various  countries  via  a
network  of  sub-custodians  in  the  countries  concerned.  These  sub-
custodians  can  be  local  branches  or  subsidiaries  of  the  global
custodian  or  can  be  local  agents.  Use  of  global  custodians  is  a
favoured  option  among  non-resident 
securities
(particularly  for  equity  trades  where  the  ICSDs  are  less  active)
because  like  ICSDs  they  (i)  eliminate  the  costs  of  maintaining
multiple  access  to  local  agents;  (ii)  can  offer  lower  overall  costs  of
settlement  by  exploiting  economies  of  scale  -  particularly  by
spreading  fixed  costs  (e.g.  technology  investments)  over  a  very
large  number  of  settlement  transactions;  and  (iii)  they  can  offer  a
wide  range  of  services  to  customers  at  low  cost  by  exploiting
economies  of  scope.  Global  custodians  and  ICSDs  now  have  similar
functions.  Moreover,  global  custodians  often  maintain  accounts  with
an ICSD.

traders 

in 

…use of a global
custodian …

to use a bilateral link between CSDs, which is the most recently
available but probably the least used option by non-residents. Links
between  CSDs  offer  advantages  by  reducing  the  number  of  entities
involved in the settlement process and by allowing investors to more
easily  and  cheaply  meet  any  collateral  requirements.  A  number  of
CSD-to-CSD links have now been established in the EU, but most of
these  offer  only  "free-of-payment"  settlement.  Securities  are
transferred across  the  link,  but  the  corresponding  payment  is  made
through  an  unconnected  payment  system.  Other
separately 

…or by using a
bilateral link between
national CSDs.

11 The ICSDs were established in the late 1960s to address the logistical problems created
by the need to settle physical bond certificates across borders. At the time, physical delivery
frequently required several days and there was a high incidence of failed trades. The main
innovation of the ICSDs was the immobilisation of physical securities in a centralised
custodial account and introduction of book-entry registration of transfers in place of the
physical movement of certificates. Another innovation was the concept of fungibility,
whereby account holders in the ICSD could be credited with a certain amount of securities
on deposit in the centralised custodial account without specifying the series number of the
individual certificates.

12 Back-to-back trades imply the combination of two securities transactions or more
involving the purchase and sale in some form of the same security for settlement on the
same day.

9

problems  that  have  been  identified  with  CSD-CSD  links  include  the
fact  that  banking  and  cash  management  services  are  expensive
relative to the services provided by custodians and ICSDs, while the
full range of custody services is not always provided.

Risks in cross-border clearing and settlement

As indicated above, cross-border clearing and settlement almost always
involves intermediaries in the transaction chain, implying a significantly
greater  degree  of  complexity  in  the  process.  The  relative  complexity  of
the clearing and settlement of a  cross-border securities transaction can
be  appreciated  by  reference  to  Charts 2.3-2.6  These  charts  are
illustrative  of  the  overall  flow  of  instructions  in  domestic  and  cross-
border  transactions  involving  equities,  bonds  and  exchange-traded
derivatives.13

The relative complexity
of a cross-border
transaction is reflected
in the overall flow of
instructions for its
execution

Chart  2.3  describes  the  instruction  flows  for  a  stylised  domestic  equity
transaction. In this example, the investor initiates the trade through his
usual  broker  (1).  The  broker  (1)  will  seek  a  counterpart  broker  (2)  on
the  local  stock  exchange.  If  the  facility  is  available,  the  trade  may  be
novated to a CCP. The investor will use his custodian (B) to interact with
the  national  settlement  system  and  the  national  cash  clearing  system,
typically the central bank. The details of the transaction are as follows:

• Step 1: 

The transaction begins with the investor wishing to invest
in  a  domestic  equity.  He  contacts  his  broker  (1)  with  an  order  to
buy.

• Step 2: 

The  broker  (1)  finds  another  broker  (2)  matching  his

order on the stock exchange.

• Step 3: 

The  matched  instruction  transferring  the  equity  from
Broker (2) to Broker (1) may be sent to the CCP, if available, and is
then sent on to the settlement system.

• Step 4: 

The  investor  forwards  confirmation  of  the  trade  to  his

custodian (B), Broker (1) instructs delivery of equity to (B).

• Step 5:

The  custodian  (B)  confirms  receipt  of  equity  from

Broker  (1) and instructs delivery of cash.

• Step 6:

The transaction is settled with the payment leg conducted

via the central bank.

13 These charts should not be interpreted as representing standard transactions. The flow of
instructions can vary in complexity from one transaction to another. For example, the flow
of instructions in a domestic transaction can be made simpler by the availability of straight-
through-processing, while the flow of instructions for a cross-border transaction could be
even more complex if settlement were to take place via several settlement systems.

10

Chart 2.3 Instruction flows in Domestic Equities Transaction

1. Buy

INVESTOR

r
e
f
s
n
a
r
t

s
d
n
u
F

.
4

P
T
S
m

r
i
f
n
o
C

.
4

1
m
o
r
f
P
V
R

f
o

Custodian (B)

2. Buy

Stock
Exchange

2. Sell

Broker (1)

Front Office

Back Office

3
National
CCP (if any)

4. DVP to B

STP possibly

Broker (2)

Front Office

Back Office

3’. STP of trade
between 1 and2
to CCP & CSD

Securities

5. Confirm STP of RVP from 1

Cash

5. Cash transfer into Central Bank Money

Trade

Clearing

Cash

Confirmation

National Settlement
System
CSD

6. Settlement

National Cash
Clearing System -
Central Bank

11

Chart  2.4  describes  the  instruction  flows  for  a  stylised  cross-border
equity transaction, illustrating its complexity from trading to settlement.
In this example, the actors involved in a cross-border equity transaction
are the investor who initiates the trade via his usual local broker (A) and
settle it through his local custodian (B). In this example all three of the
actors are located in the same country. As the equity trade takes place
in  a  foreign  country,  local  broker  (A)  will  use  a  foreign-country  broker
(1), who will seek a counterpart broker (2) on the foreign-country stock
exchange. If the facility is available, the trade may be novated to a CCP.
The  local  broker  (A)  will  need  a  foreign-country  custodian  (Y)  and  a
foreign-country cash clearer. The local custodian (B) will need a foreign
country custodian (X) as well and yet another cash clearer. The national
central  bank  of  the  foreign  country  may  be  involved  in  the  cash  leg  of
the trade settlement. The details of the transaction are as follows:

• Step1: 

The transaction begins with the investor wishing to invest
in a foreign equity. He will contact his local broker (A) with an order
to buy.

• Step 2: 

Local  broker  (A)  will  forward  the  investor’s  order  to  his

corespondent foreign-country broker (1).

• Step 3:

  The  foreign-country  broker  (1)  finds  another  foreign-
country  broker  (2)  matching  his  order  on  the  foreign-country  stock
exchange. The matched instruction may be sent to the CCP.

• Step 4:  All  agents  receive  and  forward  confirmation  of  the
investor’s  order,  while  the  instruction  transferring  the  equity  from
(2) to (1) is usually sent automatically to the foreign-country CSD.

• Step 5: 

Local  broker  (A)  instructs  his  foreign-country  custodian
(Y) to receive the equity from the foreign-country broker (1) and to
deliver it to foreign-country custodian (X); the margin transfer (and
foreign  exchange  conversion)  from  Broker  A  to  the  foreign-country
CSD  are  conducted  via  the  foreign-country  cash  clearer  of  local
broker  (A)  and  the  foreign-country  cash  clearing  system;  the
investor  instructs  his  local  custodian  (B)  to  receive  the  equity  from
the  foreign-country  custodian  (Y)  of  his  local  broker  (A)  and
transfers the necessary funds for payment to his local custodian (B).

• Step 6: 

The  local  custodian  (B)  instructs  its  foreign-country
custodian  (X)  to  receive  the  equity  from  the  foreign-country
custodian (Y) of the local broker (A).   The transfer of the investor’s
funds  for  payment  is  made  from  the  local  custodian  (B)  to  its
foreign-country cash clearer.

• Step 7: 

Foreign-country  broker  (1)  receives  the  equity  from
foreign-country broker (2); then, foreign-country broker (1) delivers
it to foreign-country custodian (Y), who delivers it to foreign-country
custodian  (X)  –  all  within  the  settlement  system  of  the  foreign-
country  CSD;  the  foreign-country  cash  clearer  of  local  broker  (A)
transfers  funds  for  payment  to  the  foreign-country  CSD,  while  the
foreign-country  cash  clearer  of  the  local  custodian  (B)  transfers  the
investors  funds  to  the  foreign-country  cash-clearer  of  local  broker
(A).

12

Chart 2.4 Instruction flows in Cross-Border Equities Transaction

INVESTOR

r
e
f
s
n
a
r
t

s
d
n
u
F

.
5

x
e
r
o
F
&

Y
m
o
r
f

P
V
R

.
5

Local
Custodian (B)

1. Buy

4.
Confirm
+ Margin

Local Broker
(A)
Front Office

Back Office

2. Buy

4.
Confirm
+Margin

Domestic
Broker (1)

Front Office

Back Office

3. Buy

4.
Confirm

5.
RVP from 1
DVP to X

x
e
r
o
F
&

r
e
f
s
n
a
r
t

i

n
g
r
a
M

.
5

7. DVP to Y

Custodian Y
(Sub of Broker A)

Custodian X
(Sub of Cust B)

Securities

6. RVP from Y

9. Confirmation

Stock
Exchange

3. Sell

4.
Confirm

3’’
National
CCP (if any)

9. Confirmation

Domestic
Broker (2)

Front Office

Back Office

.

7
D
V
P

t

o

1

7.
RVP from 1
DVP to X

7.

RVP from Y

National Settlement
System
CSD

8. Cash usage

Cash

6. Funds transfer
& Forex

Trade

Clearing

Cash

Confirmation

Local Broker A’s
Cash Clearer

7. Cash transfer

Local Custodian B’s
Cash Clearer

National Cash
Clearing System -
Central Bank

13

• Step 8: 

The  payment  leg  of  the  transaction  is  conducted  via  the

foreign-country central bank.

• Step 9:  Confirmation  is  then  sent  to  all  actors  and  equity
transaction 
foreign-country
is  booked  (credit/debit)  between 
custodian  (X)  and  local  custodian  (B)  and  between  local  custodian
(B) and the investor.

Chart  2.5  describes  the  instruction  flows  for  a  stylised  Eurobond
transaction.  In  this  example,  the  actors  involved  are  the  investor  who
initiates the trade through his usual broker (1). The broker (1) will seek
a  counterpart  broker  (2)  to  conduct  an  over-the-counter  (OTC)
transaction. The transaction is settled in an ICSD, with the payment leg
investor’s  cash  correspondent  and  the  cash
conducted  via  the 
correspondent  bank  network.  The  details  of  the  transaction  are  as
follows:

• Step 1:

 The transaction begins with the investor wishing to invest

in a Eurobond. He contacts his broker (1) with an order to buy.

• Step 2: 

The  broker  (1)  finds  another  broker  (2)  matching  his

order and purchases the Eurobond in an OTC transaction

•

•

•

Step 3:
investor and calls for a margin payment.

  Broker  (1)  confirms  the  terms  of  the  trade  with  the

Broker  (1)  sends  instructions  to  the  ICSD  to  receive  the
Step 4:
Eurobond from Broker (2) and deliver it to the investor. The investor
sends  instruction  to  ICSD  to  receive  the  Eurobond  from  Broker  (1),
while instructing his cash correspondent to transfer the funds to the
  (Broker  (2)  sends  the  same
cash  correspondent  network. 
instructions in reverse.)

Step 5: The transaction is settled in the ICSD, with the payment leg
conducted via the cash correspondent network.

Chart  2.6  details  the  instructions  flow  for  a  stylised  exchange-traded
derivatives  transaction.    The  actors  in  this  transaction  are  (i)  the
investors, who are the initiators of the process because of their opposite
wishes to buy (A) and to sell (B) the same amount of derivatives at the
same price; (ii) the executing brokers, one for each Investor, that have
joined the Derivative Exchange by applying for the relevant (in terms of
financial  products  traded)  membership.  They  require  customers  (the
Investors)  to  pledge  financial  assets  in  order  to  secure  that  any  legal
obligation will be timely executed; and (iii) the general clearing member
who, in this example, is the same for both executing brokers and acts at
a  superior  level  of  membership  in  the  Exchange.  The  Derivatives
Exchange  is  a  publicly  regulated  and  publicly/privately  owned  entity
whose function is to let supply and demand of a standardized derivative
product meet in a orderly fashion under a shared framework of rules and
by-laws. The clearinghouse who can be part of the Derivatives Exchange

14

in a vertically oriented business model or –as in the flow chart- can be a
third publicly regulated, publicly/privately owned body, whose function is
to  grant  perfect  execution  of  the  contractual  obligations  resulting  from
the  investor  community’s  activity  as  vested  by  their  executing  brokers.
The detailed instruction flow is as follows:

• Step 1:

Investor  A  (B)  decides  to  buy  (sell)  n  lots  of  I  derivative
instrument  at  p  price.  He  communicates  the  order  to  his  broker.
Investor pledges financial assets to his executing broker.

• Step 2:

The executing broker enters the Derivatives Exchange and
under his own name feeds the bid side (sell side) of the market. The
matching  of  time,  price  and  size  allows  the  orders  to  become
executed.

• Step 3:

The  executing  broker  tells  his  general  clearer  the  details

of the transaction (give-up of trades).

• Step 4:

The  new  long  (short)  position  generated  is  settled  at  the
clearinghouse, which allocates the relevant side of the transaction to
the general clearer claiming for it.

• Step 5:

The clearinghouse asks the general clearer for the deposit

of the initial/variation margins.

• Step 6:

The  general  clearer  rebates  the  relevant  initial/variation
margin  call  to  the  executing  broker  A  (B)  who,  in  turn,  has  the
guarantee of the pledge by investor A (B).

These  charts  indicate  not  only  the  relative  complexity  of  cross-border
clearing  and  settlement  but  also  that  the  clearing  and  settlement  of
cross-border  transactions  in  equities  is  significantly  more  complex  than
for  transactions  in  bonds  and  derivatives.  Focusing  on  equities,  the
additional  complexity  of  a  cross-border  transaction  as  represented  in
these charts is reflected in:

(i) the need for as many as 11 intermediaries for a  cross-border
equity  transaction,  compared  to  only  5  for  a  corresponding
domestic transaction;

(ii)  the  fact  that  a  single  cross-border  transaction  requires  a
minimum  of  14  instructions  between  parties  (i.e.  buy  orders,
securities  and  cash  movements)  and  as  many  confirmation
messages;  (iii)  the  need  for  investor’s  cash  to  be  exchanged  in
the  local  currency  and  converted  into  the  country’s  national
central  bank  money  in  the  case  of  a  cross-border  transaction
involving different currencies; and

(iv) the extent to which different systems and references impede
a  satisfactory  level  of  straight-through  processing  for  cross-
border transactions.

15

Chart 2.5: Instruction flows in Eurobond transaction

INVESTOR
INVESTOR

1. Buy

3.
Confirm
+ Margin

2. Buy

OTC

2. Sell

Broker (1)
Broker (1)

Front Office
Front Office

Back Office
Back Office

Broker (2)

Front Office

Back Office

4. Send RVP instruction against Broker 1
and DVP instruction against Investor

4. Send RVP instruction from Broker 1

4. Instruct funds transfer

Investor’s
Cash Correspondent

International
International
Settlement System
Settlement System
ICSD
ICSD

5. Settlement

Cash Correspondent
Bank Network-
Commercial Bank

16

Chart 2.6 Instruction flows for exchange-traded derivatives

Investor A

Investor B

1
.
B
u
y

1
.

l

P
e
d
g
n
g

i

1
.
S
e

l
l

Executing 
Broker « A »

Member of 
the 
Derivatives 
Exchange

Executing 
Broker « B »

Member of 
the 
Derivatives 
Exchange

General Clearing 
Member of the 
Derivatives 
Excchange

6. Individual margin calls

2
.
B
u
y

2
.
S
e

l
l

3. Both trades are given up

Derivatives Exchange

4.New positions opened and old     

ones closed

Clearinghouse

s
l
l

a
c

i

n
g
r
a
m
n
o
i
t
a
i
r
a
v

r
o
/
d
n
a

l

a
i
t
i
n
I
.
5

17

 
 
 
 
 
 
 
 
 
The  greater  complexity  of  cross-border  transactions,  and  equity-based
transactions in particular, means that their settlement (and clearing to a
lesser  extent) involves  credit risk beyond that normally  associated  with
a  domestic  settlement.  In  addition,  the  relative  complexity  of  cross-
border trades involves a higher level of operational risk.

Credit  risk  that  is  equally  associated  with  clearing  and  settlement  of
both domestic and cross-border trades includes:

• principal risk which is the possibility that either counterparty to the
trade  will  fail  to  meet  his  obligations,  which  can  be  addressed  by
moving to a DVP system in the CSD concerned

While a cross-border
transaction involves the
credit risk normally
associated with a
domestic transaction...

•

•

•

replacement  risk  which  is  the  possibility  that  either  counterparty
will  fail  to  meet  his  obligations  on  the  due  settlement  date  and
leaving the other counterparty  with the cost  of replacing, at current
market prices, the original transaction; this risk can be addressed by
proper 
through  a
clearinghouse with collateralised exposure or within the CSD;

risk  management  when  cleared 

internal 

liquidity  risk  which  is  the  possibility  that  either  counterparty  will
not settle an obligation for the full value on the due date but at some
unspecified  date  thereafter;  this  risk  can  also  be  addressed  by
proper 
through  a
clearinghouse with collateralised exposure or within the CSD.

risk  management  when  cleared 

internal 

cash  deposit  risk,  which  can  be  considered  as  a  specific  form  of
liquidity  risk  arising  from  the  need  to  hold  cash  balances  with  an
intermediary for settling the security transactions.

… these risks are
increased by the need to
use intermediaries.

The  sources  of  credit  risk  that  are  more  specifically  associated  with
cross-border securities transactions include:

•

•

•

custody risk, which is the possible loss of securities held in custody
because  of  insolvency,  fraud  or  negligence  of  the  custodian  or  sub-
custodian.  As  is  clear  from  the  channels  described  above,  there  is
greater  reliance  on  custodians,  or  multiple  custodians,  for  cross-
border  settlement.  Therefore,  this  category  of  risk  is  increased
beyond  the  level  for  domestic  settlement.  The  key  response  to  this
risk is segregation of customer securities from the "owned" securities
of  the  custodian.  The  availability  of  operational  links  between
national  CSDs  would  also  address  this  risk  by  reducing  the  need  to
use custodians.

legal risk, which is the possibility of an unexpected application of a
law/regulation  or  because  a  contract  cannot  be  enforced.  Cross-
border settlement involves multiple legal jurisdictions, such that this
risk is increased.

foreign  exchange  risk,  which  arises  from  possible  movements  in
exchange, rates between the trade date and the settlement date. In
addition,  liquidity  risk  can  be  increased  in  a  multi-currency
environment.

18

While  much  of  the  additional  risk  attached  to  cross-border  settlement
arises  from  the  need  to  use  more  intermediaries,  the  problem  is  not
clear-cut. The use of a local agent will certainly create custody risk and
the  use  of  multiple  local  agents  or  a  global  custodian  (with  sub-
custodians)  will  increase  that  risk.  However,  the  single  access  point
provided  by  the  global  custodian  or  ICSD  will  reduce  operational  risk,
and they can provide other services which help in cash management and
reduce money settlement uncertainty  relating  to  fails.  Moreover,  ICSDs
and  global  custodians  also  provide  ancillary  services  that  facilitate
securities  and  cash  management  and  often 
lend  securities  to
participants to ease liquidity and replacement risk.

III. Conclusion

The  clearing  and  settlement  processes  are  essential  features  of  a
smoothly functioning securities  market.  Clearing  and  settlement  can  be
achieved  in  different  ways  and  can  involve  several  intermediaries  in
addition  to  the  buyer  and  seller.  The  complexity  of  a  securities
transaction, i.e. the complexity of the clearing and settlement processes,
is directly related to the number of actors involved. In this context, it is
worth noting that a cross-border securities transaction normally involves
a  greater  number  of  actors  than  a  domestic  transaction.  The  increased
risks that are associated with cross-border clearing and settlement imply
additional  costs  to  the  ultimate  investor.  Clearly,  the  potential  for
additional  risk  and  cost  in  cross-border  transactions  rises  with  the
number  of  different  clearing  and  settlement  systems  that  must  to  be
used.  A  summary  of  the  current  institutional  arrangements  for  clearing
and  settlement  in  the  European  Union  is  provided  in  the  next  section,
clearly  demonstrating  the  extent  of  fragmentation  facing  the  pan-EU
investor.  The  costs  associated  with  that  fragmentation  are  then
considered in Section 4.

On the other hand, the use
of intermediaries can
serve to reduce
operational risk.

In sum, the complexity
of the clearing and
settlement processes is
directly related to the
number of actors
involved and a cross-
border securities
transaction normally
involves a greater
number of actors than
a domestic
transaction.

19

Section 3: Overview of EU clearing
and settlement infrastructure
________

I.

Evolution of the EU clearing and settlement
infrastructure.

The  existing  infrastructure  for  the  provision  of  clearing  and  settlement
services in the European Union is the product of a fragmented securities
market.  Historically,  the  pattern  of  European  securities  trading  has
followed national lines, a pattern that was reinforced by the existence of
different currencies (for a long time accompanied by exchange controls)
and  relatively  basic  technology.  The  result  has  been  the  emergence  of
an  efficient  infrastructure  for  securities  markets  in  each  Member  State,
often  comprising  the  full  or  partial  integration  of  trading,  clearing,
settlement and depository functionalities.

A history of national-
based securities trading
has resulted in a
fragmented EU
infrastructure for
clearing and
settlement…

The  emergence  of  national-based  infrastructures  for  clearing  and
settlement  has  resulted  in  a  wide  variation  in  the  procedures  and
requirements associated with the provision of these services across  the
Union.  This  variation  reflects  not  only  specific  market  practices  in  each
Member  State  but  also  more  fundamental  differences  in  national
frameworks  for  the  regulatory,  legal  and  fiscal  treatment  of  securities.
The  extent  of  fragmentation  in  the  EU  clearing  and  settlement
infrastructure  has  been  exposed  by  the  increased  demand  for  cross-
border trading that is an inevitable consequence of financial integration.
As  discussed  in  the  previous  section,  the  additional  cost  and  risk
associated with this fragmentation represents a significant limitation on
the scope for cross-border  securities trading in the European  Union.  By
extension,  it  also  represents  an  important  limitation  on  exploiting  the
economic benefits of the Internal Market and the euro.

The  evolution  of  the  EU  clearing  and  settlement  infrastructure  has  also
differed across the main securities markets. In the fixed-income market,
the expansion in issuance of Eurobonds since the late 1960s resulted in
the  creation  of  the  two  international  central  securities  depositories
(ICSDs)  –  Euroclear  Bank  and  Cedelbank,  now  Clearstream
International. Indeed, the  Eurobond market itself  can  be  interpreted  as
a  means  to  offer  efficient  trading  in  the  presence  of  inefficiently
separated  markets.  The  ICSDs  were  established  specifically  to  provide
settlement services to this international market. Over time, the range of
products that are processed by ICSDs has expanded to cover most types
of bonds and to a lesser extent other securities such as equities.

The  capacity  of  the  ICSDs  to  provide  international  clearance  and
settlement  services  for  the  bond  market  has  been  helped  by  the
comparative  homogeneity  in  fixed-income  securities  and  the  extent  to
which  they  have  been  commoditised.  Equities  are  more  heterogeneous
instruments  and  more  complex  to  manage  particularly  with  respect  to
corporate actions and insofar as they require continuous communication
between  the  company  that  has  issued  the  equity  and  its  holder.  In

…which is inefficient in
the context of increased
demand for cross-
border trading within a
progressively integrated
EU financial system.

The evolution of the EU
clearing and settlement
infrastructure has also
differed across the main
securities markets, with
cross-border
arrangements most
developed for the bond
markets.

Clearing and settlement
of cross-border equity-
transactions is
particularly
challenging.

20

consequence,  cross-border  clearing  and  settlement  of  equities  -  in  the
presence  of  varying  technical  requirements,  market  practices,  fiscal
procedures  and  legal  environments  among  the  Member  States  –  is
particularly challenging.

The  market  structures  for  exchange-traded  derivatives  have  evolved
very  differently  from  those  for  the  fixed-income  and  equity  markets.
Unlike  securities,  exchange-traded  derivatives  are  instruments  that  are
based  on  a  bilateral  contract  -  open  or  closed  –  between  two  market
participants. The execution of derivatives trades typically takes place via
direct  members  of  exchanges,  and  the  clearinghouse  acts  as  central
counterparty  for  all  such  trades.  While  clearing  and  settlement  are
simply  post-execution  stages  in  a  securities  transaction,  clearing  is  the
core  process  for  the  creation  of  an  exchange-traded  derivative.  As  the
clearing  process  is  integral  to  the  very  existence  of  a  market  for
exchange-traded derivatives, the CCP plays a role that is analogous to a
CSD in a securities market.

The market structures
for exchange-traded
derivatives have
evolved very differently
from those for the fixed-
income and equity
markets.

II.

Current  institutional  arrangements  for  EU  clearing
and settlement

In considering the problems created by fragmentation in the EU clearing
and  settlement  infrastructure,  a  first  step  is  to  review  current
institutional  arrangements  for  the  provision  of  these  services.14  The
following  overview  -  based  largely  on  the  ECB’s  Blue  Book  (2001)15  –
provides a concise description of these arrangements at the national and
international  level,  focusing  also  on  the  existence  of  any  cross-border
links  between  institutions.    A  summary  table  is  provided  at  the  end  of
the section.

Fragmentation in the EU
clearing and settlement
infrastructure is evident
from a review of current
institutional
arrangements.

Belgium

In September 2000, the Belgium, French and Dutch  Exchanges merged
to  form  Euronext.  Through  these  three  Exchanges  Euronext  manages
both  regulated  and  unregulated  markets  comprising  a  cash  market  for
financial  instruments,  a  derivatives  market  and  a  commodity  market.
The  integrated  Euronext  market  will  cater  for  small  to  medium-sized
companies,  blue-chips  and  New  Economy  companies.  Trade  will  be
conducted on a single trading platform, in conformity with unified Rules.

Clearnet  is  the  central  counterparty  performing  clearing  services  for  all
transactions executed on Euronext. Clearnet is a credit institution under
French law and is wholly-owned by Euronext (Euroclear will acquire 20%
of  the  capital  in  the  near  future).  Its  head  office  is  in  Paris  and  it  has
branches  in  Brussels  and  Amsterdam.  The  Belgian  branch  currently

Trading in Belgium

Clearing in Belgium

14 The section describes the arrangements in each country for trading, clearing (including
any central counterparty arrangements) and settlement of securities and derivatives.
Custody and depositary functions are not examined.

15 In general therefore, the text describes the situation as it stood in the Summer of 2001,
although more up-to-date information has been included where possible.

21

operates on the technical platform used by the Brussels Clearing House,
but  is  migrating  to  a  common  platform  that  will  be  used  in  all  three
Member  States.  Membership  rules  and  risk  management  procedures
have also been harmonised across the three Member States.

There are three securities settlement  systems,  Euroclear  Bank,  the  CIK
(Caisse Interprofessionelle de Dépôts et de Virement de Titres s.a.) and
the  settlement  system  of  the  National  Bank  of  Belgium.  Equity  and
private  sector-debt  transactions  on  the  stock  exchange  are  settled
through  BXS-CIK,  while  public-sector  debt  transactions  are  settled
through  the  settlement  system  of  the  National  Bank.  The  CIK  will
transfer  its  settlement  activity  customer  book  to  Euroclear  in  the  near
future.  At  present,  CIK  has 
foreign  central
depositories. These include Euroclear-France, Necigef (the Netherlands),
SEGA  (Switzerland)  and  Clearstream  Bank  Frankfurt  (CBF)  and
Euroclear  Bank.  The  National  Bank  system  offers  clearing  and
settlement of fixed-income securities (public sector debt securities) in a
dematerialised environment only.

links  with  several 

Settlement in Belgium

Denmark

Securities  trading  in  Denmark  takes  place  in  the  SAXESS  joint  trading
system  of the NOREX alliance  between  the  Copenhagen  and  Stockholm
exchanges. The Copenhagen exchange (CSE) began the trading of listed
equities  in  SAXESS  in  June  1999  and  the  trading  of  bonds  in
October 2000.  Trading  of  futures  and  options  has  been  transferred  to
the fully-automated Swedish derivatives system.

There is no CCP for the Danish securities markets. The Danish Securities
Centre (Værdipapircentralen or VP) is the single market institution in the
Danish  market,  which  undertakes 
the  clearance  of  securities
transactions.  FUTOP  clears  all  derivatives  contracts  that  are  registered
on  clearing  accounts,  exchange-traded  transactions  and  off-exchange
transactions.

Trading in Denmark

Clearing in Denmark

The  VP  also  handles  the  settlement  of  securities  transactions  in  the
Danish market. The VP has links with the Swedish CSD (VPC), Euroclear
and  Clearstream  Bank  Luxembourg  (CBL).  FUTOP  offers  the  settlement
of  transactions  in  futures  and  options  even  though  trading  has  been
transferred to the Swedish derivatives system.

Settlement in Denmark

Germany

There are eight stock exchanges, with the highest turnover (about 90%)
generated  on  Frankfurt  exchange  (FWB)  operated  by  the  Deutsche
Börse  AG.  Deutsche  Börse  runs  the  electronic  Xetra  platform,  which  is
also  used  by  the  Vienna  and  Irish  exchanges.  The  other  regional
exchanges  are  in  Berlin,  Bremen,  Dusseldorf,  Hamburg,  Hannover,
Munich  and  Stuttgart.  Options  and  futures  are  traded  on  the  Eurex
exchange,  which  is  operated  by  Eurex  AG,  and  is  a  joint  venture
between Deutsche Börse AG and the Swiss national exchange. Eurex has
co-operation arrangements with the Helsinki Exchanges Group (HEX).

Trading in Germany

22

Currently,  there  is  no  CCP  for  trades  executed  on  the  German  stock
exchanges. Clearstream Bank Frankfurt (CBF) provides clearance for all
securities  transactions  on  German  exchanges  and  OTC 
trades.
Derivatives  trades  -  as  well  as  EurexBonds  and  Euro-Repo  trades  -  are
cleared through EurexClearing AG, a fully owned subsidiary of the Eurex
exchange.  EurexClearing acts as central  counterparty  and  allows  cross-
border  and  cross-product  netting  of  positions.  It  plans  to  extend  its
activities  to  other  segments  of  the  securities  markets.  The  trading  and
clearing systems are integrated, and EurexClearing has automated links
for  securities  settlement  with  the  CBF  and  Euroclear  (the  choice  of  the
settlement  location  is  left  to  the  single  clearing  members).  For
settlement of derivatives trades, there are links to SIS (Switzerland) and
to CBF.

CBF,  which  is  also  the  national  CSD,  provides  securities  settlement  for
all  trades  on  German  exchanges.  CBF  is  a  wholly  owned  subsidiary  of
Clearstream International SA, which in turn is owned 50% by Deutsche
Börse  AG  and  50%  by  the  shareholders  of  Cedel  International  SA.
Further details on Clearstream International are provided below.

Greece

The Hellenic Exchanges S.A. group (HELEX) is a holding company with a
dominant position in the Greek capital markets. The main components of
the  Group  are  the  Athens  Stock  Exchange  SA  (ASE),  the  Athens
Derivatives  Exchange  (ADEX),  Thessaloniki  Stock  Exchange  Centre,  the
Athens  Derivatives  Exchange  Clearing  House  (ADECH)  and  The  Central
Securities  Depository  SA  (CSD  SA).  HELEX  is  controlled  by  the  Hellenic
Government,  which  has  a  40.9%  share  of  the  capital.  The  HDAT  is  an
electronic  secondary  market  for  Greek  government  securities,  which  is
operated and managed by the Bank of Greece.

Clearing in Germany

Settlement in Germany

Trading in Greece

There  is  no  central  clearinghouse  for  securities  markets  in  Greece.
ADECH  provides  central  counterparty  clearing  services  (and  guarantees
settlement) of derivatives trades on ADEX. ASE has a 35% share of the
ownership of ADECH.

Clearing in Greece

There are two securities settlement systems, CSD SA for private equities
and  bonds,  and  BOGS  for  all  Greek  government  debt  instruments.
CSD SA  is  the  national  CSD  and  provides  settlement  of  all  transactions
relating to registered and bearer shares listed on the ASE. The ASE has
reduced its previously full ownership of CSD SA to some 38.5%. CSD SA
is  not  linked  with  any  other  settlement/depository  organisation  but
proposes  to  link  with  other  central  depositories  via  the  ECSDA-
sponsored  Eurolinks  system.  BOGS  is  managed  by  the  Bank  of  Greece
and has no direct links with foreign settlement systems or CSDs.

Settlement in Greece

Spain

Spain  has  four  stock  exchanges,  in  Madrid,  Barcelona,  Bilbao  and
Valencia. The four exchanges jointly own the Sociedad de Bolsas, which
is  responsible  for  the  technical  management  of  their  common  trading
platform,  i.e.  the  Spanish  Stock  Markets  Interconnection  System.

Trading in Spain

23

Government  securities  and  debt  instruments  issued  by  other  public
administrations  and  entities  are  traded  on  the  Public  Debt  book-entry
market  (CADE),  which  is  managed  by  the  Banco  de  España.  Corporate
debt instruments are traded in the AIAF fixed-income market, run by the
Spanish securities dealers associations. The future and  options markets
are managed by the MEFF (Mercado Español de Futuros Financieros).

There is no clearing house/central counterparty other than MEFF, which
acts  as  CCP  for  the  derivative  markets.  MEFF  is  an  electronic  system,
integrating  the  trading,  clearing  and  settlement  of  derivatives.  The
Spanish  settlement  systems  are  responsible  for  clearance  and  netting
the  cash  positions  in  the  markets  they  serve,  but  they  do  not  assume
settlement risk.

Spain  has  two  main  settlement  systems,  i.e.  the  SCLV  (Servicio  de
Compensacion, y Liquidacion de Valores) and the CADE (Caja General de
Dépositos).  In  addition,  there  are  three  regional  systems  with  limited
scope  (SCL  Barcelona,  SCL  Bilbao,  and  SCL  Valencia).  SCLV  is  the
settlement  system  for  all  listed  securities  traded  on  the  stock
exchanges.  SCLV  is  40%-owned  by  the  four  Spanish  stock  exchanges.
CADE acts as central depository and provides settlement services for the
trades  in  public  and  private  fixed  income  securities.  SCLV  and  CADE
have  established  cross-border  links  with  settlement  systems  in  Italy
(Monte Titoli), the Netherlands (Necigef) and France (Euroclear France).
CADE has also a link with CBF. Consolidation in the securities settlement
system  is  foreseen  with  a  future  merger  of  CADE  and  SCLV.  In  June
2000,  the  two  companies  established  a  joint-venture  company  named
IBERCLEAR, which establishes the basis for a future single Spanish CSD.

Clearing in Spain

Settlement in Spain

In  June  2001,  the  main  institutions  of  the  Spanish  securities  markets
(i.e.  the  governing  companies  of  the  four  stock  exchanges,  MEFF,
IBERCLEAR  and  FC&M,  and  the  commodities  derivative  market)  agreed
to form the Bolsas Y Mercados Españoles, Sociedad Holding de Mercados
y  Sistemas  Financierors  S.A.    This  new  entity  will  be  responsible  for
strategic co-ordination of the Spanish markets.

Consolidation of
Spanish infrastructure
is underway.

France

There  are  four  regulated  markets:  (i)  the  Bourse  de  Paris;  (ii)  the
Nouveau  Marché  which  is  open  to  high-growth  companies;  (iii)  Matif
which  trades  interest-rate  futures  and  options;  and  (iv)  Monep  which
trades  futures  and  options  on  equities  and  equity  indexes.  Euronext
Paris  manages  all  of  these  markets  as  well  as  the  unregulated  Marché
Libre. In September 2000, ParisBourse SA merged with the Amsterdam
and Brussels exchanges to form Euronext, as a single integrated market,
comprising  a  cash  market  for  equities  and  bonds,  a  derivatives  market
and  a  commodity  market.  The  integrated  Euronext  market  caters  for
small  to  medium-sized  companies,  blue-chips  and  New  Economy
companies. Trade will be conducted on one technical platform, with the
former national exchanges becoming local entry points with unified rules
of access. This stage has already been reached for the cash markets.

Since May 1999, Clearnet has been the single clearinghouse and central
counterparty for all of the above markets, and clears OTC cash and repo

Trading in France

Clearing in France

24

trades  in  French  and  German  government  securities.  Clearnet  became
the  single  clearinghouse 
it  merged  with
clearinghouses in the Netherlands (AEX) and Belgium (BXS) in February
2001.

for  Euronext,  when 

Euroclear  France,  formerly  Sicovam,  is  the  national  CSD  and  operates
the country’s settlement system – Relit de Grande Vitesse (RGV) which
became  the  single  platform  for  settlement  of  all  securities  transactions
in  June  2001.  Euroclear  France,  which  is  a  wholly-owned  subsidiary  of
Euroclear  Bank,  has  established  links  with  foreign  CSDs  and  ICSDs.
These  are  CBF,  OeKB  in  Austria,  the  settlement  system  of  the  National
Bank of Belgium, Euroclear and the CIK  in  Belgium,  CADE  and  SCLV  in
Spain,  APK  in  Finland,  Monte  Titoli  in  Italy,  Necigef  in  the  Netherlands
and CBL in Luxembourg.

Ireland

The  Irish  Stock  Exchange  provides  the  main  national  market  for  Irish
equities and government bonds. The Irish Stock Exchange operates the
Official  List,  the  Developing  Companies  Market,  the  Exploration
Securities  Market  and  the  ITEQ  Market.  The  Official  List  is  the  main
market  for  listed  companies  and  Irish  Government  bonds.  The
Developing Companies Market is for new and developing companies. The
Exploration  Securities  Market  is  confined  to  exploration  and  mineral
companies. The ITEQ Market is the Technology Market of the Irish Stock
Exchange.

There  is  currently  no  central  counterparty  for  transactions  in  Irish
equities  or  bonds.  Clearance  is  undertaken  by  the  relevant  settlement
system.  Transactions  in  Irish  equities  and  corporate  bonds  have  been
settled in CREST  since  its  launch in  1996.  Euroclear  Bank  has  provided
settlement services for Irish government bonds since the closure of the
Central  Bank  of  Ireland  Securities  Settlement  Office  (CBISSO)  in
December 2000.

Italy

The  Italian  Stock  Exchange  is  managed  by  Borsa  Italiana  S.p.A  and
comprises the Mercato Telematico Azionario (MTA) for stock, convertible
bonds  and  warrants,  the  Mercato  Ristretto,  for  stock,  bonds  and
warrants not officially listed, the Nuovo Mercato (NM) a market for high
growth companies, a market for Covered Warrant (MCW), a market for
equity  derivatives  (IDEM),  the  Italian  futures  market  (MIF),  the  retail
government  and  corporate  bonds  market  (MOT)  and  the  market  for
traditional  options  on  equities  (MPR).  In  2000,  the  Italian  Stock
Exchange  introduced  EuroMOT,  a  market  designed  for  Eurobonds,
foreign bonds and asset-backed securities. The wholesale screen-based
market  for  government  securities  (MTS)  is  managed  by  MTS  S.p.A.  A
guarantee  fund  exists  to  secure  the  performance  of  securities
transactions  dealt  on  MTA  and  NM.  The  Cassa  di  Compensazione  e
Garanzia  (CCG)  manages  this  fund  but  does  not  act  as  central
counterparty.

25

Settlement in France

Trading in Ireland

Clearing and settlement
of Irish securities.

Trading in Italy

Clearance  and  netting  is  provided  via  the  LDT  procedure,  which  is
managed  and  owned  by  the  Banca  d’Italia.  The  CCG  acts  as  a
clearinghouse  for  the  derivatives  exchanges.  In  the  context  of  an
alliance with the Spanish Futures and Options Exchange (MEFF) and the
Matif (France), there is a link between the CCG and Matif.

Clearing in Italy

Settlement  services  are  also  provided  via  the  LDT  procedure,  with
settlement  across  the  books  of  the  national  CSD,  Monte  Titoli,  against
central  bank  money.  OTC  transactions  and  monetary  policy  operations
are settled directly by Monte Titoli via Express, a  system  managed  and
owned  by  Monte  Titoli.  Monte  Titoli  has  established  links  with  foreign
CSDs and ICSDs. These are CBF, OeKB in Austria, Euroclear and CIK in
Belgium,  CADE  and  SCLV  in  Spain,  Necigef  in  the  Netherlands,  CBL  in
Luxembourg, Euroclear France, SIS in Switzerland and the DTCC in US.
The CCG also manages a separate guarantee fund, which is designed to
ensure  timely  settlement  of  transactions  in  listed  equities,  convertible
bonds, warrant and fund units.

Luxembourg

The Luxembourg stock exchange provides for trading in bonds, equities
and  participations  in  undertakings  for  collective  investments  (UCIs).
There  is  no  independent  clearinghouse  in  Luxembourg.  Clearance  and
settlement  of  securities  transactions  is  performed  CBL,  which  is  the
national  CSD.  CBL  is  part  of  Clearstream  International  (see  below  for
details).  CBL  is  substantially  integrated  with  CBF  in  Germany  and  the
two CSDs aim to migrate all of their operations onto a single IT platform
by  the  end  of  2002.  CBL  is  authorised  to  perform  a  complete  range  of
banking services, but these are limited (by CBL’s by-laws) to facilitating
its core clearance and settlement business. A wide selection of securities
transactions  (e.g.  bonds,  Eurobonds,  convertibles,  equities,  money-
market  instruments  etc.)  is  processed  by  CBL,  which  operates  a  multi-
currency  system.  A  bridge  arrangement  exists  between  CBL  and
Euroclear  Bank,  which  allows  transactions  to  be  settled  between  their
respective customers.  CBL is also designated by the Banque Centrale de
Luxembourg to act as the CSD for handling securities used as collateral
in ESCB credit operations.

The Netherlands

In  September  2000,  the  Amsterdam  exchange  (AEX)  merged  with  the
Brussels  and  Paris  exchanges  to  form  Euronext  as  a  single  integrated
market, comprising a cash market for equities and bonds, a derivatives
market  and  a  commodity  market.  The  integrated  Euronext  market
caters  for  small  to  medium-sized  companies,  blue-chips  and  New
Economy  companies.  Trade  will  eventually  be  conducted  on  one
technical  platform,  with  the  former  national  exchanges  becoming  local
entry  points  with  unified  rules  of  access.  This  stage  has  already  been
reached for the cash markets.

Clearnet  has  been  the  CCP  for  Euronext  Amsterdam  since  February
2001.  Clearnet  is  wholly-owned  by  Euronext  and  has  branches  in
Brussels  and  Amsterdam.  The  Dutch  branch  currently  operates  on  the

26

Settlement in Italy

Trading, clearing and
settlement in
Luxembourg

Trading in the
Netherlands

technical platforms used by AEX, but is migrating to a common platform
which  will  be  used  in  all  three  Member  States.  Membership  rules  and
risk  management  procedures  have  been  harmonised  across  the  three
Member States.

Euronext transactions will be settled at the national level until end-2003
at the latest. Settlement services are provided by  Euronext Amsterdam
Stock  Clearing and Necigef, the latter  of which is the  national  CSD  and
provides for settlement of off-exchange transactions. Necigef is also part
of  Euronext  Amsterdam.  Necigef  is  linked  to  CSDs  in  Belgium,  France,
Germany,  England,  Finland,  Austria,  Luxembourg,  Italy,  Spain,  and
Switzerland.

Austria

Austria’s only stock and derivatives exchange is located in Vienna and is
operated  by  Wiener  Börse  AG,  which  has  been  a  privately  owned
company since the Government sold its 50% shareholding in June 1999.
Wiener  Börse  provides  for  trading  in  equities  (including  new  economy
companies),  bonds,  warrants,  other  securities,  futures  and  options.
There  is  also  an  OTC  market.  Wiener  Börse  AG  has  established  a
strategic  partnership  with  Deutsche  Börse  AG.  The  two  exchanges  are
joint  owners  of  the  New  Europe  Exchange  (NEWEX),  which  is  also
located in Vienna and deals exclusively with central and Eastern Europe.

There  is  no  independent  clearinghouse  for  the  equities  market.  Post-
trade  and  pre-settlement  clearance  services  are  performed  by  the
national  CSD  (Oesterreichische  Kontrollbank  AG).  The  derivatives
market  of  Wiener  Börse    (OTOB)  provides  clearing  for  all  standardised
derivative products, using a real-time clearing system (OM Secure). The
exchange  acts  as  counterparty  to  all  derivatives  transactions  and  so
guarantees fulfilment of those transactions. CBF performs clearance and
settlement of transactions on the NEWEX exchange.

The  national  CSD  is  operated  by  the  Oesterreichische  Kontrollbank  AG
and settles both OTC and exchange transactions. The OeKB is a private
entity. The CSD maintains links with several foreign CSDs for all types of
securities.  These  are  CBF  in  Germany,  CBL  in  Luxembourg,  Necigef  in
the  Netherlands,  SIS  in  Switzerland,  Euroclear  in  Belgium  and  France,
Monte  Titoli  in  Italy  and  Keler  in  Hungary.  The  CSD  also  acts  as  a
depository  for  Euroclear  in  respect  of  all  Austrian  bonds.  Settlement  of
the  derivatives 
in  Oesterreichische
Kontrollbank  AG  for  EURO  denominated  products  and  in  Euroclear  for
USD denominated derivatives.

transactions  are  performed 

Clearing in the
Netherlands

Settlement in the
Netherlands

Trading in Austria

Clearing in Austria

Settlement in Austria

Portugal

The  Lisbon  and  Oporto  Stock  Exchange  (BVLP)  is  a  limited  liability
company consisting of the entities previously known as the Lisbon Stock
Exchange  Association  (ABVL)  and  the  Oporto  Derivatives  Exchange
Association 
the  Lisbon  exchange  signed  a
memorandum  of  understanding  with  Euronext,  which  is  seen  as

(ABDP).  Recently, 

Trading in Portugal

27

indicating a formal merger. The BLVP also operates an electronic trading
system for futures and options trading.

Clearance  and  settlement  services  are  provided  by  Interbolsa,  the
national  CSD  owned  by  the  BVLP.  Besides  Interbolsa,  there  is  an  SSS
called  SITEME,  owned  by  the  Banco  de  Portugal  and  managed  by  the
Markets and Reserve Management Department. It is used by the Banco
de Portugal  to  settle  its  own  operations  and  operations  of  the  Treasury
and  other  credit  institutions.  Currently,  Portuguese  central  bank  paper
and commercial paper are the  only two types  of  securities  deposited  in
SITEME. In the future, however, tradable money market securities may
also be deposited with this CSD.

Finland

Helsinki  Securities  and  Derivatives  Exchange,  Clearing  House  Ltd.
(Helsinki  Exchanges)  is  a  regulated  marketplace  that  deals  in  equities,
bonds,  options,  futures  and  other  derivative  instruments.  Most  bond
trading  and  all  money  market  trading  in  Finland  takes  place  over  the
counter. Securities trading, clearing and registration and the depositing
and  custody  of  listed  securities  are  concentrated  among  the  various
subsidiaries  of  the  HEX  Group,  which  has  been  operating  in  its  current
form since April 1999. The HEX Group is planning to obtain a listing on
the Helsinki Exchanges. For this reason, it is reorganising its structure to
focus  on  five  business  areas:  corporate  services,  trading,  custodial
services, securities services and internet-based services.

There are no  independent  clearing  houses  in  Finland.  Arvopaperikeskus
(APK),  which  is  the  Finnish  CSD  and  part  of  the  HEX  group,  provides
participants with centralised services related to the handling, ownership,
clearance and settlement of securities registered in book-entry form. All
stock,  warrant  and  bond  trades  on  the  Helsinki  Exchanges  are  cleared
centrally by APK.

APK is the only CSD holding such a licence in Finland, as well as the only
SSS  operator.  For  historical  reasons,  the  SSS  of  APK  consists  of  two
technically  separate  sub-systems,  namely  the  RM  system  for  settling
money market instruments and most debt securities and the OM system
for  settling  shares,  other  equity-related  securities  and  some  debt
securities. APK has a link with CBF and Euroclear France.

Clearing and settlement
in Portugal

Trading in Finland

Clearing in Finland

Settlement in Finland

Sweden

The OM Stockholm Exchange was established by the merger by the OM
derivatives  exchange  and  the  Stockholm  Stock  Exchange  in  1998.  The
OM  Stockholm  Exchange  has  one  trading  system  (SAXESS)  for  trading
equities  and  derivatives.  The  majority  of  trading  in  fixed-income
instruments is done in a professional OTC telephone market with trading
reported  to  the  OM  Fixed  Income  Exchange  at  the  end  of  the  day.  In
addition,  there  are  two  other  authorised  marketplaces  offering  equities
trading in small companies, Aktie Torget AB and SBI Marknadsplats AB.

Trading in Sweden

28

The Om Stockholm Exchange is the clearing organisation, which acts as
central  counterparty  in  the  transactions  that  are  cleared.  Clearing
includes both derivatives traded on the exchange and derivatives traded
outside the exchange.

Clearing in Sweden

VärdePappersCentralen  (VPC)  is  the  only  organisation  in  Sweden
operating  an  SSS  –  the  VPC  system  –  and  providing  the  services  of  a
CSD. As of September 2000, VPC had links to the Danish system VP for
settlement of transactions in government bonds.

Settlement in Sweden

United Kingdom

indices  and 

There are nine regulated markets (under the ISD) in the UK. The London
Stock  Exchange  (LSE)  operates  the  Domestic  Equity  Market,  the
European  Equity  Market,  the  Gilt  Edged  and  Sterling  Bond  Market  and
the  Alternative  Investment  Market  (AIM).  LIFFE  operates  the  London
International  Financial  Futures  and  Options  Exchange  with  derivatives
contracts  on  UK  and  foreign  government  bonds,  short-term  interest
rates,  equity 
individual  equities.  Liffe  has  recently
announced  that  it  is  to  merge  with  Euronext.  Other  markets  are  OMLX
(operated  by  OM  London),  which  primarily  trades  in  Swedish  equity
derivatives;  virt-X,  a  pan-European  market  in  blue  chip  equities
operated  in  conjunction  with  SWX;  Coredeal,  primarily  a  eurobond
market;  and  Jiway  (also  owned  by  OM  group)  for  smaller  scale
transactions  in  US  and  European  equities.    Fixed  income  trading  is
primarily  OTC,  though  a  number  of  intermediaries  offer  interdealer
execution  platforms.  London  Metal  Exchange  (LME)  and  International
Petroleum Exchange (IPE) also offer trading in  standardised  derivatives
contracts.

LCH  is  the  principal  clearinghouse  in  the  UK,  providing  central
counterparty  services  for  LSE,  LIFFE,  LME  and  IPE.  LCH  also  provides
two  OTC  services:  Repoclear,  for  clearing  of  cash  and  repo  trades  in  a
number  of  European  government  and  international  bonds,  and  German
jumbo  pfandbriefe;  and  Swapclear,  for  interbank  and  interest  rate
swaps.  LCH is 75% owned by its members and 25% by LIFFE, LME and
IPE and operates on a non profit-making basis.  OMLX and Jiway operate
in-house clearing and CCP facilities. For Coredeal a central counterparty,
TradeGo, assumes counterparty risk.

CRESTCo,  a  private  company  owned  by  the  users  of  CREST,  operates
two  settlement  systems  in  the  UK:  CREST  and  CMO.  CREST  settles
transactions  in  UK  and  Irish  equities,  corporate  bonds  and  UK
government  debt.    Money  market  instruments  are  settled  in  CMO,  but
work  is  underway  to  incorporate  them  into  CREST.  CREST  has  links  to
Euroclear in Belgium, CBF and SIS in Switzerland (through which it links
to  all  other  European  markets).  Participants  in  virt-x  can  choose  to
settle  transactions  in  any  of  CREST,  Euroclear  or  SIS.  Jiway  offers
internal  settlement  through  accounts  in  its  own  books,  or  external
systems.  Eurobond
settlement 
through  designated 
transactions  on  Coredeal  settle 
Internationalor,
Euroclear, and US Treasury transactions in Fedwire in the US.

settlement 
in  Clearstream 

Trading in the United
Kingdom

Clearing in the United
Kingdom

Settlement in the United
Kingdom

29

Clearstream International and Euroclear Bank

Clearstream International is an international CSD and provides clearance
and  settlement  of  domestic  and  cross-border  securities  transactions,
mainly  in  debt  securities  (i.e.  Eurobonds,  global  bonds,  Brady  bonds,
foreign  bonds,  US  foreign-targeted  securities,  government  bonds,
corporate  bonds,  short-to  medium  term  instruments  etc.)  Clearstream
International  was  formed  by  the  merger  of  Cedel  International  (the
Luxembourg-based ICSD) and the German CSD Deutsche Börse Clearing
in 2000. Clearstream International is owned 50% by Deutsche Börse AG
and 50% by the shareholders of Cedel International. Beside the holding
company  located  in  Luxembourg,  there  are  three  main  subsidiaries:
CBL,  CBF,  and  Clearstream  Services  Luxembourg  (CSL).  Clearstream
International  clears  and  settles  securities  transactions  in  38  currencies
in  33  markets  (including  all  15  national  markets  in  the  EU)  through  a
network  of  links  and  service  providers.  For  each  link,  Clearstream
International  relies  on  the  services  of  a  local  agent,  which  is  either
another  central  securities  depository  or  a  financial  institution  in  the
respective market. Clearstream International also offers a wide range of
ancillary services.

Euroclear  Bank  is  owned  by  Euroclear  PLC,  which  in  turn  is  owned  by
121  institutional  shareholders  -  none  of  which  holds  more  than  5%  of
the  share  capital.  As  with  Clearstream  International,  Euroclear  focuses
on  the  clearance  and  settlement  of  internationally  traded  securities,
clears and settles securities transactions in 42 currencies in 33 markets
(including all 15 national markets in the EU) and provides a wide range
of  ancillary  services  Euroclear  has  signed  a  memorandum  of
understanding with Brussels Stock Exchange (BXS) and the Amsterdam
Stock  Exchange  (AEX)  to  integrate  the  respective  national  CSDs  of
Belgium  and  the  Netherlands,  CIK  and  Necigef.  Thus,  settlement  of  all
transactions  on  the  Euronext  exchange  will  be  located  in  Euroclear.  In
2000,  all  Irish  government  bond  settlement  activity  was  transferred  to
Euroclear.

Clearing and settlement
by Clearstream

Clearing and settlement
by Euroclear

An  electronic  “bridge”  linking  International  and  Euroclear  has  existed
since  1980  and  was  substantially  upgraded  in  1993.  This  bridge  allows
Clearstream  and  Euroclear  participants  to  deliver  securities  free  or
versus  payment  to  each  other.  Initiatives  to  further  improve  the
efficiency of the bridge have been announced recently.

Bridge between
Clearstream and
Euroclear

III.

Conclusions

This  overview  of  institutional  arrangements  for  clearing  and  settlement
confirms the extent of fragmentation in the EU infrastructure. While the
clearing  and  settlement  infrastructure  is  undoubtedly  in  a  phase  of
consolidation  -  driven  primarily  by  developments  at  the  trading  level  -
there  remains  a  very  substantial  number  of  different  national  and
international  providers  of  these  services.  For  example,  there  are  19
CSDs  and  two  ICSDs  providing  various  types  of  services  and  with
various governance structures.  Some  Member  States  have  independent
clearinghouses  with  CCPs  while  others  have  clearing  and  settlement

30

integrated  in  one  provider.  One  Member  State  has  neither  clearing  nor
settlement  infrastructure.  In  some  Member  States,  clearing  and
settlement  providers  are  privately  owned  and  independent  of  other
market  infrastructures,  while  in  other  Member  States  providers  are
integrated  into  other  market  infrastructures  and/or  have  the  State  as
shareholders. Moreover, although cross-border links exist between many
of these providers, the evidence suggests that these links are not widely
used.16  On  the  basis  of  these  institutional  differences  alone  –  and
without  reference  to  the  differences  in  technical  requirements/market
practice, taxation and legal frameworks that are discussed in Section 5 -
the  complexity  of  post-trade  processing  for  the  pan-EU  investor  is
obvious.  The  extent  to  which  this  complexity  is  reflected  in  the  cost  of
clearing  and  settling  cross-border  transactions  is  examined  in  the  next
section of the report.

The EU clearing and
settlement
infrastructure is
consolidating but there
remain a very
substantial number of
different national and
international providers
of these services.

16 According to ECB data, only 29 links are used out of the 62 currently available for cross-
border use of collateral in ESCB credit operations.

31

TABLE 3.1
Summary Table of Institutional Arrangements for Securities Trading, Clearing and Settlement in the European Union

Country/ICSD

Trading

Clearing

Settlement

Settlement links

Belgium

Denmark

Germany

Greece

In September 2000 the
exchanges of Brussels,
Amsterdam and Paris
merged to form Euronext,
comprising a cash market
for equities and bonds, a
derivatives market and a
commodity market.

The Copenhagen stock
exchange (CSE) is part of
the NOREX using SAXESS;
trading of futures and
options transferred to the
fully automated Swedish
derivatives system.

Eight stock exchanges of
which Frankfurt is the most
important; options and
futures traded on Eurex
exchange.

Clearnet.

Settlement is provided by
the National Bank of
Belgium’s (NBB) system and
CIK, which is expected to
merge with Euroclear.

CIK has links with France,
Netherlands, Switzerland,
Germany and Euroclear
Bank.

No CCP; the Danish
Securities Centre (VP)
undertakes the clearance of
securities transactions;
FUTOP, clears all derivatives
contracts.

VP provides settlement
services for the CSE and
also settles OTC trades;
FUTOP settles derivatives
transactions.

VP has established a link
with Sweden, Euroclear and
Clearstream Banking
Luxembourg.

Clearstream Banking
Frankfurt provides
settlement of all securities
transactions.

CBF has links to Euroclear,
the Netherlands, Austria,
Finland, Luxembourg, Spain
and Italy.

No CCP; clearance and
settlement is performed by
Clearstream Banking
Frankfurt AG (CBF), the
national CSD; derivatives
trades, Eurex-Bond trades
and Euro-Repo trades are
cleared via EurexClearing
AG.

HELEX Exchanges S.A
operates three exchanges;
HDAT is an electronic
secondary market for Greek
government securities.

No independent
clearinghouse or CCP for
securities. ADECH: a CCP for
trades on the Athens
Derivatives Exchange.

Two settlement systems:
BOGS (managed by the
bank of Greece) for
government dept
instruments and CSD SA
(part of HELEX Group) for
other securities.

CSD SA not linked to other
CSDs but proposes to link
via the ECSDA-sponsored
Eurolinks system; BOGS has
no links with foreign CSDs.

32

Country/ICSD

Trading

Clearing

Settlement

Settlement links

Four stock exchanges with a
common trading platform;
government debt traded
OTC on CADE; futures and
options markets managed
by MEFF.

No independent
clearinghouse or CCP for
securities; MEFF acts as a
CCP for the derivative
markets, integrating the
trading, clearing and
settlement of derivatives.

Spain’s main settlements
systems are the SCLV, SCLV
AIAF and CADE; in addition
three regional systems with
limited scope.

SCLV and CADE have
established inks with Italy,
the Netherlands, France and
Clearstream Banking
Frankfurt.

Euronext Paris operating
four regulated markets.

Clearnet.

Euroclear France (formerly
Sicovam) operating RGV.

Euroclear France has links
with Belgium, Germany,
Spain, Italy, Luxembourg,
Austria, the Netherlands and
Finland; Euroclear Bank.

The Irish Stock Exchange

No independent
clearinghouse; clearing
undertaken by the relevant
settlement system.

Equity and corporate bond
transactions settled in
CREST (UK); government
bonds transactions settled in
Euroclear²

Spain

France

Ireland

Italy

Italian Stock Exchange
operated by Borsa Italiana
S.p.A

Luxembourg

Luxembourg Stock
Exchange.

Clearing of securities
provided via LDT procedure
operated by the Banca
d’Italia; Cassa di
Compensazione (CCG) is
clearinghouse for derivatives
market.

No independent clearing
house; clearance
undertaken by Clearstream
Banking Luxembourg.

Settlement provided in
Monte Titoli via the LDT
procedure or directly for
OTC transactions

Monte Titoli has links to
Belgium, Germany, France,
Austria, Spain and the
Netherlands.

Clearstream Banking
Luxembourg.

Electronic bridge with
Euroclear Bank.  Links to
Belgium, Austria, Denmark,
Netherlands and Italy.

33

Country/ICSD

Trading

Clearing

Settlement

Settlement links

Netherlands

Euronext Amsterdam.

Clearnet.

Austria

Vienna stock exchange and
NEWEX.

Portugal

Finland

Sweden

Lisbon and Oporto Stock
Exchange (BVLP); MTS
Portugal for government
debt.

Helsinki Exchanges (HEX)

The OM Stockholm
Exchange has one trading
system (SAXESS) for trading
equities and derivatives.

No independent
clearinghouse in Austria;
National CSD clears
securities; Vienna stock
exchange (OtöB) clears
derivatives; Clearstream
Banking Frankfurt clears
NEWEX transactions.

Interbolsa

No independent
clearinghouses or CCP;
clearance provided by APK,
the national CSD.

No independent
clearinghouses or CCP; Om
exchange provides clearing
for securities and
derivatives.

Euronext transaction to be
settled at national level until
the end of2003; services
provided by Negicef.

National CSD for Vienna
stock exchange operated by
OeKB; Clearstream Banking
Frankfurt for NEWEX.

Necigef, the national CSD, is
linked to Belgium, France,
Germany, England, Finland,
Austria, Luxembourg, Italy,
Spain, and Switzerland.
Belgium, Germany,
Hungary, France,
Luxembourg, Italy,
Netherlands and
Switzerland.

Interbolsa and SITEME
(owned by Bank of
Portugal).

Settlement provided by APK
and HEX for derivatives.

APK has links to Clearstream
Banking Frankfurt and
Euroclear.

Settlement provided by VPC.

VPC has links to Denmark.

34

Country/ICSD

Trading

Clearing

Settlement

Settlement links

United Kingdom

Clearstream International

Euroclear Bank

Nine regulated markets –
operated by LSE, LIFFE, OM,
Tradepoint, virt-x, Coredeal
and Jiway (owned by OM).

London Clearing House
(LCH) is principal provider of
clearing and acts as CCP for
several markets; OM and
Jiway operate in-house
clearing; TradeGo is CCP for
Coredeal.

CrestCo settles transactions
in UK and Irish equities, UK
corporate and government
debt; Jiway offers internal
settlement.

CrestCo has links to
Euroclear, SIS and DTCC
and indirect links to all
North American and west
European markets.

Clears and settles securities transactions in 33 markets through a network of links.

Clears and settles securities transactions in 33 market through a network of links.

35

Section 4: Cost of clearing and settling
 cross-border securities transactions
 in the European Union17

________

I.

Scope of exercise

Fragmentation  in  the  EU  clearing  and  settlement  infrastructure  creates
inefficiency by increasing risk in cross-border securities transactions and
by  erecting  barriers  to  competition  between  national  service  providers.
Inefficiency  in  the  clearing  and  settlement  of  cross-border  transactions
relative to domestic transactions is reflected in three types of additional
costs  to  the  pan-EU  investor.  These  are  (i)  direct  costs  in  the  form  of
higher  fees  for  the  cross-border  clearing  and  settlement  services
provided; (ii) indirect costs in the form of extra back-office facilities that
must  be  maintained  (often  bought  in  from  an  intermediary)  so  as  to
manage the clearing and settlement of cross-border transactions18; and
(iii) opportunity costs in the form of inefficient use of collateral, a higher
incidence of failed trades and trades that are simply foregone because of
the difficulties involved in post-trade processing across borders.

Estimation  of  the  additional  costs  of  cross-border  clearing  and
settlement  is  a  difficult  exercise.  The  opportunity  costs  are  largely
unobservable  and  could  be  estimated  only  by  modelling 
the
counterfactual  of  a  fully  integrated  EU  clearing  and  settlement
infrastructure.  Constructing  such  a  model  is  beyond  the  scope  of  this
report  and  would,  in  any  event,  be  a  highly  speculative  exercise.  The
indirect costs associated with the extra back-office facilities necessitated
by  the  current  fragmented  infrastructure  are  observable.  However,
analysis  of  these  costs  would  require  access  to  detailed  managerial
accounts  of  the  investors  and  intermediaries  concerned.  As  the  Group
does not have such access, the analysis in this report is confined to the
direct costs of cross-border clearing and settlement. However, it should
be  noted  that  there  is  evidence  to  suggest  that  these  direct  costs
constitute a relatively minor share of total.19

Inefficiency in cross-
border clearing and
settlement is reflected in
direct costs, indirect
costs and opportunity
costs.

The analysis in this
report focuses on the
direct costs of
inefficiency.

17 This section of the report draws on analysis carried out by the Centre for Economic
Policy Studies (CEPS) as part of its wider study of EU settlement arrangements.
18 These costs relate to extra staff and skills needed to have sufficient knowledge of the
specific characteristics of the local securities, as well as the local language, legal system
and possibly technological requirements.
19 See Annex III for a discussion of indirect and direct costs based on estimates by
Euroclear Bank and Clearstream International.

36

A comparison of
settlement fees is an
obvious approach in
assessing the relative
cost of cross-border and
domestic transactions.

The data suggest that the
settlement fees of the
ICSDs are considerably
more expensive than
those of the national
CSDs….

II.

Estimating the additional cost of settling a cross-
border transaction

Comparison of settlement fees

An  obvious  approach  to  analysing  the  additional  costs  of  clearing  and
settlement  of  cross-border  securities  transactions  would  be  to  compare
the  fee  schedules  for  the  processing  of  internal  (i.e.  intra-system)  and
external  (i.e.  inter-system)  transactions  by  the  various  providers.
However, there are problems of data availability. Very little information
is available on clearance costs, while many CSDs are reluctant to make
their  settlement  price  lists  public,  limiting  the  scope  for  comparing  fee
schedules. Nevertheless, Tables 4.1 (a), (b) and (c) present a sample of
the  published  settlement  fees  of  EU  providers.  Table  4.1  (a)  lists  the
settlement  fees  of  national  CSDs,  whose  activities  are  predominantly
focussed on  their  domestic  markets.  The  two  ICSDs  –  Clearstream  and
Euroclear  –  focus  more  on  the  processing  of  cross-border  transactions
and  Tables  4.1  (b)  and  4.1  (c)  list  their  respective  fee  schedules  for
selected  markets.  The  fees  of  the  ICSDs  are  categorised  under  three
headings:  (i)  internal  or  external  settlement;  (ii)  international  or
domestic instruments; and (iii) equity or bonds.

The data suggest that the settlement fees of the ICSDs are considerably
higher than those of the national CSDs. This is particularly the case for
external  settlement,  where 
the  securities  being  processed  are
transferred between systems. Fees for external settlement by the ICSDs
in the major markets such  as the  United  States  or  United  Kingdom  are
relatively  low,  while  the  more  expensive  settlement  occurs  where
trading  volumes  are  limited.  This  phenomenon  is  probably  attributable
to  scale  economies  in  the  settlement  process  and/or  the  higher  degree
of competition in these markets.

Table 4.1

Fees for Settlement in the EU

(a) Settlement fees of a sample of national CSDs, in euro

     National CSDs                                     Mainly domestic transactions

Denmark

Germany

French

Italy

Equity

0.11-2.28

Bond

0.25-0.40

0.125-5.00

0.30-1.13

0.30-1.13

0.72

United Kingdom

0.32-0.90

Switzerland

0.26

37

(b) Settlement fees of Clearstream for selected markets, in euro

CSD

Internal

External

International
securities

Equity

2.00

Bond

1.35

Domestic
securities

Equity

2.00

Bond

1.35

International
Securities

Domestic
securities

Equity

Bond

Equity

Bonds

..

..

..

..

2.71

1.35

2.71

1.35

..

..

32.47

32.47

27.60-
48.70

21.65-
27.06

2.16

2.16

..

..

..

..

..

..

32.47

32.47

32.47

32.47

32.47

32.47

32.47

32.47

21.65

21.65

13.53-
27.06

10.82

5.41

13.53-
27.06

10.82

10.82

Clearstream
LU

Euroclear
Bank

SIS

DE

FR

UK

US

(c) Settlement fees of Euroclear for selected markets, in euro

CSD

Internal

External

International
securities

Domestic
Securities

International
securities

Domestic
securities

Equity

Bond

Equity

Bond

Equity

Bond

Equity

Bond

..

0.49-2.16 0.49-2.16 ..

..

..

1.03-2.71 1.03-2.71 ..

-

-

-

..

-

0.60-2.71 0.60-2.71

Clearstream
LU

Euroclear
Bank

SIS

DE

FR

UK

US

..

..

..

..

..

..

..

..

0.32-1.73 0.32-1.73 ..

0.60-2.71 0.60-2.71 ..

0.54-2.16 0.54-2.16 ..

0.54-2.16 0.54-2.16 ..

..

..

..

..

9.74-
16.23

5.94-
10.80

4.33-8.66 1.52-6.49

23.81-
32.47

6.49-
10.82

7.58-
21.65

9.74-
16.23

4.33-8.66 6.49-
10.82

Source: CEPS using data from national CSDs, Clearstream and Euroclear.

Apart  from  the  problem  of  data  availability,  there  are  important
limitations  to  the  approach  of  comparing  settlement  fee  schedules.
There  is  neither  a  “typical”  fee  nor  a  “typical”  service  in  processing  a
domestic  or  cross-border  securities  transaction.  The  fee  structure  of
providers  tends  to  be  highly  complex,  with  the  fee  actually  paid  by
clients dependent on a wide  range of  factors.  These  factors  include  the
type  of  securities  to  be  processed,  the  type  of  client,  the  volume  of
business  of  that  client,  the  client’s  method  of  payment,  the  client’s

…but, the comparability
of the data is limited by
the absence of a typical
settlement fee and a
typical settlement
service.

38

An alternative approach
focuses on the operating
income per transaction
settled….

…in a subset of CSDs
for which comparable
data are available.

relationship with the provider (e.g. share in ownership of the CSD) etc.
Meanwhile,  the  settlement  service  provided  varies  with  the  provider.
Some  CSDs  provide  only  the  narrow  settlement  functionality  while
others  offer  a  range  of  ancillary  services,  such  as  intra-day  credit  and
securities lending. A simple comparison of the fee schedules for settling
a  domestic  and  cross-border  transaction  is,  therefore,  likely  to  yield  a
misleading view of the relative costs.20

Comparing operating income of providers

An  alternative  approach  to  calculating  the  relative  costs  of  settling
cross-border  and  domestic  transactions  in  the  EU  focuses  on  the
operating income of service providers per transaction settled. This more
indirect approach to estimating the cost of settlement services was used
by the London Stock Exchange (LSE) in its submission to the European
Commission  in  connection  with  DG  COMP’s  separate  investigation  into
the pricing of clearing and settlement in the EU. The LSE submission was
also provided as a response to the questionnaire used in preparing this
report.  By  using  the  income  and  expenditure  accounts  of  the  clearing
and  settlement  providers  to  derive  an  implicit  measure  of  settlement
costs,  the  LSE  approach  bypasses  many  of  the  limitations  of  a  direct
comparison  of  fee  schedules.  However,  this  approach  is  not  without
problems of its own and these are discussed below.

Data  on  the  operating  income  from  settlement  can,  in  principle,  be
obtained from the financial statements of the relevant service providers.
In  providing  the  data  for  this  report,  the  Center  for  Economic  Policy
Studies (CEPS) have widened the coverage of the LSE data to include a
larger number of EU settlement providers. In addition, the data set has
been  updated  and  refined  to  take  account  of  differences  in  accounting
practices  between  the  various  providers21.  On  this  basis,  Table 4.2
presents an overview of the operating income of the main EU settlement
providers, as well as the ICSDs. Data on the Swiss national CSD and the
US DTCC are also included. This subset of EU CSDs has been selected to
ensure the comparability of data on their operating income22. Several of
the EU CSDs have been excluded because they are integrated with other
parts  of their domestic market infrastructure and  separate  accounts  for
settlement activities are unavailable. For others, data are unavailable for
the period after 1999.

stake in cross-border

20 Determining the full cost of cross-border trading in Europe, and elsewhere, would
require an assessment of the cost or pricing schedule of global/local custodian which have
the biggest
settlement. Euroclear Brussels and Clearstream
International have been assessed in this study because of the availability of financial
information. However, they can not be considered as benchmark for cross-border trading
costs, as they have a very limited portion of this business and primarily deal with
eurobonds.
21 In particular, interest income, items of depreciation and amortization and exceptional
costs have been removed where it has been possible to identify these items. As it has not
always been possible to identify custody income in the annual statements, this has been
retained in total operating income. In some cases, custody income represents a significant
share of total operating income.
22 Nevertheless, full comparability cannot be guaranteed, as adjustments to the financial
accounts of the various providers involve subjective judgements.

39

Table 4.2: Operating income per transaction (in euro)
of selected CSDs

Organisation

Operating
income (€)

Transactions
(pre-netting)

OPINC/trans
action (€)

Transactions
(post-netting)

OPINC/transa
ction

ICSD

ICSD

Euroclear Bank

360,590,000

11,000,000

Clearstream Luxembourg

401,175,000

12,000,000

DK

DE

ES

GR

FR

FR

IT

PT

SE

UK

EU

VP

27,122,013

6,800,000

Clearstream Frankfurt

268,746,000

125,000,000

SCLV

CSD

Euroclear France

Clearnet France

Monte Titoli

Interbolsa

VPC***

CREST**

EU

45,758,000

11,000,000

47,805,161

21,973,933

144,968,647

135,000,000

125,448,000

22,175,332

126,395,972

14,205,395

8,654,761

43,125,089

14,633,242

143,446,634

58,816,750

1,644,565,272

531,874,658

EU(excl.ICSDs)

882,800,272

508,874,658

ICSD

SIS

103,231,065

17,745,900

32.78

33.43

3.99

2.15

4.16

2.18

1.07

0.18

1.64

2.95

2.44

2.86+

1,49+

5.82

11,000,000

12,000,000

6,800,000

125,000,000

11,000,000

21,973,933

41,000,000

8,783,635

8,654,761

14,633,242

58,816,750

319,662,321

296,662,321

17,745,900

DTCC++

US
Sources: CEPS using data from national CSDs, Clearstream and
Euroclear

638,261,727 1,387,500,000

0,46

230,271,931

32.78

33,43

3.99

2.15

4.16

2.18

6,60

2,52

1.64

2.95

2.44

5.14

2.98

5.82

2.77

Explanatory Note

Pre-netting. The data has been obtained from CSDs (either annual reports or
other public documents, web-page etc). Additional information has been taken
from the “Blue Book 2000” of the European Central Bank. post-netting data
provided where applicable. Transactions should be single-counted. However,
this is not as straightforward as it appears. The number of Clearstream Frankfurt
above is single-counted stock-exchange trades only.

Taken from profit-and-loss accounts of CSDs, as figured in the CSDs annual
reports. The figures are from 2000 unless otherwise stated.

If data is not originally in euro, the following exchange rates have been used:
1€ = US$0,924; 1€ = DKr7,45; 1€ = SKr8,45; 1€ = £0.69

If a CSD does benefit from netting then the operating income of that CCP has
been included (Clearnet France, NSCC). It has not been possible to determine
the operating income of Banca d’Italia’s L.d.T.

Per transaction operating income (excluding the income of Clearnet)

If subtract interest income, the DTCC’s discount policy makes expenditures
exceed revenues. The share of interest income (11% of total income) has,
therefor e been subtracted from the discount as well. This produces an operating
income of €638m

Banking revenues are core income for ICSDs, as their services are different from
other CSDs. The banking revenues of Euroclear Bank, on the other hand, are
largely excluded in the annual statement of Euroclear. This is due to an
agreement relating to the exit of JP Morgan (see annual report p. 65).

Number of transactions:

Operating income:

Exchange rates:

CCPs:

+

++DTCC:

ICSDs:

**

***

Daily average multiplied by 250 working days.

VPC settlement income amounted to €15,2 million in 2000. The remaining two thirds of total operating
income is mainly made up of issuance income, which is not a core activity of a CSD. The total figure
has been included, however, as it has not been possible to verify whether other EU CSDs also have
issuance income.

40

To  standardise  the  implicit  costs  of  settlement  across  CSDs,  it  is
necessary  to  focus  on  their  operating  income  per  transaction  settled.
These  data  are  also  presented  in  Table  4.2.  However,  a  particular
difficulty  with  comparing  the  per-transaction  income  of  settlement
providers  relates  to  the  treatment  of  transaction  netting.  Netting
reduces  the  number  of  transaction  that  requires  to  be  settled  by  the
provider  on  behalf  of  its  clients  and  so  raises  the  efficiency  of  the
settlement process.  To  the  extent  that  netting is  used  by  a  provider,  it
would  seem  appropriate  that  its  operating  income  should  be  calculated
on  the  basis  of  post-netting  transaction  figures  but  with  the  operating
income of the organisation carrying out the netting included. However, it
should  be  noted  that  the  use  of  post-netting  data  (by  reducing  the
underlying  transaction  volume)  has  the  somewhat  counter-intuitive
effect of increasing the measured operating income per transaction even
though  the  efficiency  of  the  service  provided  is  raised.  The  choice
between  the  use  of  pre-netting  and  post-netting  transactions  data  is
important when comparing the performance of EU CSDs with the DTCC,
since  the  latter  makes  extensive  use  of  netting  (on  average,  of  about
90% of total transactions). However, comparison among the EU CSDs is
relatively less affected because netting is less prevalent.23 However, for
completeness,  Table  4.2  presents  analysis  based  on  both  pre-netting
and post-netting transaction data.

Table  4.2  indicates  that  the  subset  of  EU  CSDs  (including  the  two
ICSDs) settled 531 million transactions before netting in 2000, which is
less  than  40%  of  the  1,388  million  transaction  settled  by  the  DTCC  in
the  United  States.  The  relative  performance  is  very  different  on  the
basis  of  post-netting  data,  with  the  subset  of  EU  CSDs  settling  320
million transactions, about 40% more than the 230 million transactions
settled  by  the  DTCC.  Irrespective  of  the  transactions  data  used,
however, the operating income of the subset of EU CSDs (about €1,645
million) was more than twice that of the DTCC (about €638m). In terms
of  the  chosen  proxy  for  settlement  cost  -  per  transaction  operating
income - the following inferences can be drawn from the data:

• Settlement  of  domestic  securities  transactions  in  the  EU  appears  to

be relatively cost efficient.

The  fragmentation  of  the  EU  clearing  and  settlement  infrastructure
would  suggest  that  the  cost  of  cross-border  settlement  should  be  high
relative  to  corresponding  services  provided  by  the  more  integrated  US
infrastructure. However, such arguments will not apply to the settlement
of  domestic  transactions  in  the  EU.  Indeed,  many  of  the  settlement
providers in the EU employ more advanced technologies than that used
in the United States. Accordingly, it is useful to consider how the income
per  transaction  of  national  CSDs  in  the  EU  compares  with  the  DTCC,
which  is  the  analogous  provider  for  the  United  States.  On  the  basis  of
post-netting transaction data, it is evident that the DTCC ranks towards
the  middle  of  the  range  of  EU  providers  in  terms  of  per  transaction
income,  with  the  (weighted)  average  figure  for  the  selected  national
CSDs (€2.98) somewhat higher than that for the DTCC (€2.77). On the
basis  of  pre-netting  transaction  data,  however,  the  corresponding  per-

23 The EU CSDs that have used equity netting in 2000 were Euroclear France, CIK, Negicef
and Monte Titoli.

41

Computing revenue per
settlement transacted
allows the implicit costs
of settlement to be
standardised across
CSDs.

The data suggest that
total EU settlement
volumes and operating
income are higher than
those in the United
States.

The EU compares well
to the United States in
terms of domestic
settlement costs...

transaction  operating  income  of  the  national  CSDs  (€1.49)  is  about
three  times  that  of  the  DTCC  (€0.46),  suggesting  scope  for  substantial
cost efficiencies from a wider use of settlement netting within the EU.24

• Settlement  cost  using  the  ICSDs  appears  to  be  relatively  high,
focus  mainly  on  cross-border

fact  that  they 

reflecting  the 
transactions.

…but inefficiency in
settling across borders
is reflected in the
relatively high per-
transaction settlement
income of the ICSDs.

The transaction volume of the two ICSDs represents a very small part of
the  total  volume  in  the  EU  (only  about  7.5%  of  the  volume  of  the
selected  CSDs).  However,  it  would  seem  that  their  per-transaction
income  is  very  much  higher  (i.e.  about  11  times  on  average  post-
netting)  than  those  of  the  national  CSDs.  A  part  of  this  differential  can
be explained by differences in the services provided. However, it is likely
that  the  bulk  of  the  differential  reflects  the  fact  that  the  ICSDs  are
mainly  active  in  the  settlement  of  cross-border  transactions  and  so
operate in a more complex environment of multiple markets. The ICSDs
(and  presumably  global  custodians  which  conduct  similar  operations)
internalise the inefficiencies caused by fragmentation in the EU clearing
and  settlement  infrastructure  on  behalf  of  their  clients  and  this  is
reflected  in  a  higher  settlement  cost.  In  this  way,  the  settlement
charges  of  the  ICSDs  are  likely  to  include  not  only  the  direct  costs  of
settling the cross-border transaction but also much of the indirect costs
as clients out-source the required back-office duties for managing cross-
border transactions.25

III. Conclusion

While  the  direct  costs  of  clearing  and  settlement  represent  a  minor
share of total, the cost analysis above highlights a stark contrast in the
efficiency of settling domestic and cross-border securities transactions in

24 While the major securities settlement participants are included in Table 4.2, settlement
providers in three Member States (Belgium, Finland and Netherlands), and parallel
securities settlement systems (e.g. Spain) are not counted. It is unclear how the inclusion of
these providers in the analysis would affect the difference between the EU average and US
average.

25 This is further evidenced by the fact that the bulk of ICSDs’ income do not relate to
settlement fees but to the servicing fees charged to support holdings in foreign securities. It
should be noted, however, that the data for the ICSDs also include transactions with
currency areas (mainly the United States and Japan) outside of the European Union.

42

in 

the  European  Union.  Efficiency 
the  settlement  of  domestic
transactions  (mainly  by  the  national  CSDs)  is  similar  to  the  analogous
service  in  the  United  States.  Within  the  EU,  however,  the  evidence
suggests that the settlement of cross-border transactions is substantially
less  efficient  than  the  settlement  of  domestic  transactions.  Allowance
must be made for issues of comparability, but it is difficult to avoid the
conclusion that a large part of the inefficiency in cross-border settlement
emanates  from  the  continued  fragmentation  of  the  EU  clearing  and
settlement  infrastructure.  The  next  section  draws  on  the  views  of
market participants to identify the barriers that lie at the source  of this
fragmentation.

The evidence points to a
stark contrast in the cost
of domestic and cross-
border settlement in the
EU, suggesting a need to
address sources of
fragmentation in the
infrastructure.

43

A barrier to efficient cross-
border clearing and
settlement is defined as any
feature that reduces
significantly the efficiency
of that process relative to
the clearing and settlement
of a domestic trade.

Based on responses to a
questionnaire, the Group
has drawn up a list of
barriers under the
headings of technical
requirements/market
practice, taxation and
legal certainty.

Section 5:Barriers to efficient cross-border
 clearing and settlement in the EU

________

in  earlier  sections, 

As  discussed 
the  clearing  and  settlement
infrastructures in the Member States have evolved in a manner that best
serves the needs of their domestic markets. In consequence, significant
national differences in clearing and settlement procedures have emerged
across  the  EU.  Some  of  these  differences  create  barriers  to  efficient
cross-border  clearing  and  settlement  to  the  extent  that  they  impose
additional  risk  and  cost  on  investors  who  operate  in  more  than  one
national  market.  For  the  purpose  of  this  report,  therefore,  a  barrier  to
efficient clearing and settlement of a cross-border transaction is defined
as any feature which reduces  significantly the efficiency  of that process
relative  to  the  clearing  and  settlement  of  a  domestic  transaction.  This
section presents a list of such barriers.

The list of barriers to efficient cross-border clearing and settlement has
been  drawn  up  largely  on  the  basis  of  responses  to  a  questionnaire,
which was circulated to market participants via the Internet.26 A total of
38  financial  institutions,  including  users  and  suppliers  of  clearing  and
settlement services, responded to the questionnaire. The list of barriers
identified  by  the  Group  has  been  sub-divided  under  three  main
headings:  (i)  barriers  relating  to  national  differences  in  technical
to  national
requirements/market  practice;  (ii)  barriers 
differences in tax procedures; and (iii) barriers relating to issues of legal
certainty  that  may  arise  between  national  jurisdictions.  The  order  in
which  the  barriers  are  listed  has  been  established  also  on  the  basis  of
the  responses  to  the  questionnaire.27  When  identifying  potential
barriers,  respondents  were  asked  to  provide  concrete  examples
wherever  possible.  Some  of  these  examples  are  reproduced  in  this
report for illustrative purposes only.

relating 

I.

Barriers  related  to  technical  requirements/market
practice.

A  number  of  important  barriers  to  efficient  cross-border  clearing  and
settlement  in  the  EU  relate  to  national  differences  in  technical
reflect
requirements/market  practice.  These  differences 

typically 

26 See Annex IV for a copy of the questionnaire. The focus of questionnaire goes beyond
the identification of barriers to also consider the main drivers of change and priorities for
future development in the clearing and settlement industry. The analysis in this section
focuses only on those responses to the questionnaire, which relate to identifying barriers to
efficient clearing and settlement. Responses to the other parts of the questionnaire will be
used as input to a follow-up report by the Group and will also be used in preparing a
Communication from the Commission to the Council and Parliament.

27 See Annex V for list of respondents to the questionnaire and Annex VI for a summary
analysis of the responses.

44

corresponding differences in the structure of national securities markets.
National differences relate more to settlement than to clearing, and their
impact  is  greater  for  equity  markets  than  for  bond  markets  or
derivatives  markets.  Particular  problems  arise  with  the  settlement  of
equity transactions because they  are  not  yet  standardised  and  because
the  complexities  of  national  equity  markets  are  more  difficult  for
participants to understand.

Barriers related to
technical requirements
and market practices
reflect differences in
national market
structures.

Ten barriers relating to
technical requirements and
market practices have been
identified.

National differences in IT
platforms and interfaces
should be minimised by
standardisation of
communication between
systems.

in 

to 

relating 

barriers 

national 

differences 

Ten 
technical
requirements/market practice have been identified and are listed below.
In  some  instances,  the  barrier  identified  is  a  specific  case  of  another
barrier  but  is  considered  sufficiently  important  to  be  highlighted
separately.  Although  they  are  treated  under  one  heading,  a  clear
distinction can be drawn between those barriers that relate to technical
requirements  and  those  that  relate  to  differences  in  market  practice.
Technical  requirements  are  typically  the  responsibility  of  the  clearing
and  settlement  systems,  while  market  practice  is  often  based  in  law.
However, the extent to which a specific market practice has a legal basis
is not always evident and varies from Member State to Member State.

Barrier 1:

National  differences  in  information  technology  and
interfaces

in 

implied  differences 

National  clearing  and  settlement  systems  operate  on  a  variety  of  non-
standardised  platforms.  The 
information
technology  and  interfaces  add  to  the  cost  of  cross-border  clearing  and
settlement  by  requiring  a  higher  level  of  manual input.  Connection  and
messaging  protocols  vary  from  one  clearing  and  settlement  system  to
another and there are different rules of transfer and product definitions,
e.g.  some  systems  require  instruction  of  a  repo  as  a  repo  whereas
others  require  two  separate  cash  legs  to  be  entered.  There  are  also
differences  in  reporting  requirements  between  systems.  The  additional
cost  arises  because  institutions  must  invest  in  understanding  the
technologies  concerned  and  in  multiple  back-office  interfaces  to
communicate with all necessary systems, with a need for additional staff
to  understand  and  support  the  various  arrangements.  On  an  individual
level,  the  technical  difficulties  are  manageable  but  the  desire  to  avoid
multiple  linkages  and  the  burden  of  following  numerous  rules  and  rule
changes are key drivers in the use of local custodians and agents. While
information
an  assessment  of 
technologies  for  clearing  and  settlement  is  beyond  the  scope  of  this
report,  it  is  essential  to  limit  the  inefficiencies  related  to  maintaining
multiple  interfaces.  To  this  end,  emphasis  should  be  placed  on
standardisation  of  communication  between  the  various  clearing  and
settlement  systems.  ECSDA  have  drafted  a  set  of  such  standards  for
communication  between  CSDs,  to  support  cross-border  settlement  of
both  DVP  and  free-of-payment  transfers.    In  this  context,  there  is  also
an  urgent  need  for  the  adoption  of  an  EU-wide  protocol  defining
message formats between systems and their members.28

the  relative  merits  of  different 

28 One specific suggestion from market participants in this context was that a deadline
could be set for the implementation of these protocols in respect of Eurosystem operations
so as to encourage widespread acceptance.

45

Barrier 2:

National  clearing  and  settlement  restrictions  that
require the use of multiple systems.

National restrictions on the location of  clearing  and  settlement  typically
require investors to use the national system. Such restrictions constitute
a  barrier  by  requiring  investors,  who  engage  in  cross-border  securities
transactions  on  multiple  stock  exchanges,  to  use  multiple  post-trading
systems. The  need  to  use  multiple  systems  is  often  generated  by  rules
that create  exclusive links between the different  elements  of  a  national
securities market infrastructure. In particular, rules can designate that a
specific central counterparty and settlement system should be used for a
particular trading platform and may impose constraints on the choice of
location  of  settlement  by  tie-in  arrangements  and  ‘silos’.29  Such
restrictions  prevent  participants,  who  undertake 
cross-border
transactions, from centralising their clearing and settlement. In the case
of  clearing,  inefficiency  arises  when  more  than  one  exchange  offers
trading  in  a  single  security,  but  each  insists  on  the  use  of  a  different
central counterparty. If a participant to a transaction bought the security
on one exchange, but sold it on another, he would be required to supply
margin  for  each  transaction  at  each  of  the  central  counterparties.  No
margin  would  be  required  if  a  single  central  counterparty  were  used,
because  the  two  transactions  would  net  to  zero.  In  the  case  of
settlement,  a  series  of  pools  of  collateral  must  be  maintained  to  cover
participant’s  activity  in  each  system,  which  is  inefficient  and  requires
cross-system  transactions  to  align  those  portfolios  of  collateral  to  their
needs.30  Rather  than  maintaining  membership  of  multiple  systems,
many 
‘outsource’  clearing  and  settlement
functions to agents that offer a standardised service for communication,
reporting, asset and cash management, etc.

institutional 

investors 

National restrictions on the
location of clearing and
settlement prevent cross-
border investors from
centralising their activities.

National restrictions on clearing and settlement may have been efficient
in  the  context  of  segmented  national  securities  markets.  However,  the
logic  behind  the  concentration  of  settlement  in  a  single  national  (and
closed) system breaks down once securities are available to be traded in
multiple  locations  and  once  participants  from  multiple  locations  are
admitted to the market. These restrictions seem outdated in the context
of  efforts  to  integrate  the  EU  financial  system.  Their  removal,  together
with the creation of bridges between national systems, would reduce the
need for institutions to outsource their clearing and settlement activities
and  would  encourage  competition  between  systems.  Accordingly,
Member  States  should  re-consider  the  appropriateness  of  any  such

Such national restrictions
are outdated in the context
of an integrated EU
securities market and
should be removed.

29 While such rules are frequently justified as facilitating straight through processing and as
reducing credit risk for the investor, it is unclear why investors – either resident or non-
resident – should be obliged to take advantage of these benefits. Also technology upgrades
have reduced substantially these benefits, as other means than vertical integration allows
the same STP objective to be achieved.

30 As a specific case, it should be noted that domestic securities in the repo market continue
to be held in domestic systems in order to facilitate delivery to the domestic central bank
for intra-day and overnight credit and for Eurosystem operations. It is not permitted under
the Eurosystem framework to deliver domestic assets directly to a central bank in another
Member State, unless there is no domestic system available.

46

restrictions  that  may  exist  within  their  domestic  securities  market
infrastructure and take the necessary steps to remove them.

Barrier 3:

Differences  in  national  rules  relating  to  corporate
actions, beneficial ownership and custody.

locally,  and  so 

National  differences  in  the  rules  governing  corporate  actions,  e.g.  the
offering of share options, rights issues etc., can be a barrier to efficient
cross-border clearing and settlement. As corporate actions often require
a  response  from  the  securities  owner,  national  differences  in  how  they
are  managed  may  require  specialised  local  knowledge  and/or  the
lodgement  of  physical  documents 
the
centralisation of securities settlement and custody. Particular difficulties
in  respect  of  corporate  actions  arise  from  the  inconsistent  treatment  of
compensation and cash accruals and from the differing practices used to
apply the effects of corporate actions to open transactions, e.g. different
countries  apply  different  treatments  to  the  payment  of  a  dividend  on  a
security involved in an open transaction. Efforts to improve consistency
in  the  rules  governing  corporate  actions  are  essential  if  the  integration
of  EU  equity  markets  is  to  proceed.  More  specifically,  implementation
(as  planned  through  ECSDA)  of  ISO  15022  message  standards  for
communication between CSDs on corporate actions would help to speed
up information dissemination across systems.

inhibit 

Rules on beneficial
ownership, custody and
corporate actions should be
harmonised at the EU level.

Barrier 4:

Absence of intra-day settlement finality

Intra-day  settlement  finality  is  needed  to  ensure  that  pan-EU  clearing
and  settlement  can  be  delivered  efficiently,  while  minimising  systemic
risk.  At  present,  intra-day  settlement  finality  cannot  be  guaranteed  for
all  cross-border  transactions  within  the  EU.  Settlement-cycle  timing
differences  between  platforms  tend  to  impede  same-day  transfer
between  systems  and  so  increase  the  likelihood  that  a  transfer  will  not
be finalised within a trading day. If same-day transfer or finality cannot
be  achieved,  there  is  a  requirement  for  the  counterparties  to  provide
extra  collateral  or  incur  funding  costs.31  Moreover,  the  implied  higher
risks  of  fails  in  cross-border  trades  due  to  the  absence  of  intra-day
settlement  finality  has  negative  implications  for  the  stability  of  an
increasingly  integrated  EU  financial  system.  While  settlement  systems
are already required to have intra-day finality for ECB operations, it will
be necessary for all settlement systems to take steps to ensure that any
links  between  them  provide  intra-day  settlement  finality  within  a  fixed
(short) period, if cross-border trading is to be encouraged on an efficient
and safe basis.

Intra-day settlement
finality must be
guaranteed across the EU
so as to ensure the smooth
functioning of securities
markets and to avoid
systemic risk.

31 Costs and risks arise from the delay in aligning securities between the local CSDs or
between them and the ICSD, as it is not always possible to move securities between the two
on the same day due to overnight batch processes and inadequate linkages.

47

Barrier 5:

Practical  impediments  to  remote  access  to  national
clearing and settlement systems

As  market  participants  are  required  to  interface  with  multiple  post-
trading  systems  in  the  context  of  cross-border  transactions,  there  is  a
resultant duplication of costs. This cost duplication is exacerbated when
it is necessary to establish a presence in each country where a relevant
system is located.  Remote access – i.e. the possibility for an institution
to become a member of a system located in another Member State – is
both  legally  and  technically  possible.  However,  practical  impediments
often  remove  it  as  an  option.  Some  of  the  impediments  relate  to  the
diversity  of  the  systems  themselves,  which  are  described  elsewhere  in
this  section.  Other  impediments  relate  to  market  rules  that  put  remote
members  at  a  disadvantage  to  local  members  or  which  render  nominal
access  unworkable.  These  rules  result  in  the  need  to  employ  third
parties  or  establish  a  local  entity  in  order  to  achieve  parity  with  local
members.  For  example,  a  remote  member  might  be  required  to  use  a
local agent bank for cash settlement or, to have an account at the local
central  bank,  although  access  to  such  accounts  is  only  available  to
domestic institutions. When an account at the central bank is allowed, it
is  not  accompanied  by  the  right  of  access  to  intra-day  liquidity,  which
means  that  the  remote  member  must  use  a  local  bank  to  finance  any
funding  shortfall.  Operators  of  systems  should  seek  to  ensure  that
access  to  their  systems  is  on  the  basis  of  non-discriminatory  criteria,
and  that  where  possible  those  accessing  the  system  remotely  are  on  a
level footing with local members.

Barrier 6:

National differences in settlement periods

Cross-border  clearing  and  settlement  is  complicated  by  national
differences in settlement periods and the need to make adjustments as
settlement  periods  change.  Particular  difficulty  can  arise  when  the
international settlement convention differs from that of the local market,
e.g. Germany settles on T+2, while the international convention is T+3.
Differences in settlement periods arise mainly in the case of equities and
create  a  mismatch  in  settlement  of  obligations,  which  must  be
addressed  by  using 
funding  arrangements  with  other  market
participants.  These  funding  arrangements  can  add  significantly  to  the
overall cost of executing a cross-border transaction. National differences
in  settlement  periods  again  reflect  the  historical  preferences  of
participants in the domestic market, and their removal is contingent on
the  ability  or  willingness  of  local  suppliers  of  settlement  services  to
make the required financial investment to shorten the period. While the
international  consensus  favours  a  short  settlement  period  recommends
to  limit  credit  risk,  as  a  minimum,  there  should  be  a  harmonised
settlement period for the EU as a whole.

Barrier 7:

National  differences  in  operating  hours/settlement
deadlines

Differences  in  the  operating  hours  of  national  systems  complicates
cross-border  settlement,  if  at  least  one  of  the  systems  concerned  does
frequent  batches.  In  such
not  operate  real-time  settlement  or 

48

Remote access to a system
located in another Member
State is both legally and
technically possible.
However, practical
impediments often remove
it as an option for
investors.

Settlement periods should
be harmonised across the
EU so as to reduce the need
for costly funding
arrangements in cross-
system transactions.

circumstances,  differences  in  operating  hours  can  result  in  the
incompatibility  of  deadlines  for  matching  and  delivery  in  the  different
systems.  This  type  of  problem  is  aggravated  when  there  are  different
deadlines  for  the  matching  or  delivery  of  same  instrument  within  a
settlement  system,  depending  on  where  it  was  traded.    In  addition,
inconsistency between the deadlines/opening hours of payment systems
and deadlines/opening hours of securities settlement systems can cause
problems  in  the  use  of  links.  Cash  and  stock  movements  are  usually
separate  and  subject  to  their  own  messages  in  cross-system  transfers.
Also, a particular cost arises where differences in operating hours result
in  the  need  to  pre-position  stock  in  one  system  to  ensure  that  it  is
transferred  to  another  on  time.  Although  European  settlement  systems
are  required  to  conform  to  the  operating  hours  of  TARGET,  sufficient
differences remain in the hours and deadlines to impede efficient cross-
border  clearing  and  settlement.  If  cross-border  activity  is  to  be
facilitated,  these  national  differences  will  need  to  give  way  to
harmonised  opening  hours  and  settlement  deadlines  for  the  EU  as  a
whole.

Barrier 8:

National differences in securities issuance practice

Differences in operating
hours can result in the
incompatibility of
deadlines for matching and
delivery in a cross-system
settlement and should be
harmonised across the EU.

The  clearing  and  settlement  of  cross-border  securities  trades  is
hampered  by  national  differences  in  issuance  practice  that  arise  due  to
the  lack  of  an  efficient  same-day  distribution  mechanism.32  Among  the
more important shortcomings in this area is an uneven capability across
the  securities  markets  in  Europe  to  allocate  ISIN  numbers  to  securities
issues  in  real-time.  Standardised  electronic  links  between  issuing
agents,  dealers  and  settlement  systems  would  enable  the  speedy
exchange of issuance information and ISIN codes, facilitating same-day
issuance.

Efforts are required to
address differences in
securities issuance
practice, which result in an
uneven capability to
provide same-day issuance.

Barrier 9:

National restrictions on the location of securities

National  restrictions  often  apply  to  the  location  of  securities.  Such
restrictions can limit the choices for issuers when placing their securities
and/or  make  it  more  complicated  to  hold  and  settle  those  securities  in
Member  States  other  than  the  place  of  issuance.  In  this  context,  two
types of restrictions have been identified:

•

First,  there  is  a  requirement  in  some  Member  States  that  issues  in
listed  securities  be  deposited  exclusively  in  the  local  settlement
system  and/or  that  transactions  in  such  securities  be  capable  of
settlement  exclusively  on  the  books  of  the  local  settlement  system.
This seems also to be the market practice in countries where it is not
enshrined in law.

• Second, there may be a connection between listing on the regulated
market and registration with a local registrar. This can constrain the
choice of settlement location available to users because the selection
of  a  foreign  settlement  system  will  be  less  attractive,  particularly

32 In particular, the lack of an intra-day bridge and intra-day borrowing facilities at the
ICSDs and the delays between the ICSDs and the local market reduce the ability to settle
new issues effectively.

49

National restrictions on the
location of securities
complicate settlement
across borders and should
also be removed.

when  the  local  settlement  system  is  the  approved  local  registrar  or
has already an established network of links with local registrars.

National restrictions on the location of securities reflect the evolution of
historically  efficient  national  structures,  when  there  was  little  demand
for  trade  in  domestic  securities  by  non-residents.  However,  formal
restrictions  on  the  location  of  securities  are  difficult  to  justify  in  the
context  of  an  integrated  EU  financial  system  and  the  Member  States
should take steps to remove them.

Barrier 10: National  restrictions  on  the  activity  of  primary

dealers and market makers33

As  a  specific  case  of  Barrier  1,  restrictions  on  the  activity  of  primary
dealers  and  market-makers  often  require  the  setting-up  of  local
securities operations and the settlement of primary-market transactions
in  the  local  settlement  system34.  Such  restrictions  prevent  primary
dealers and market-makers whose activities span several markets from
centralising  their  settlements  in  fewer  systems.35  The  inability  to
centralise  cross-border  settlements  raises  the  cost  of  their  operations
because  they  are  prevented  from  using  their  preferred  settlement
location  (if  any)  for  these  market  operations  and,  by  implication,  they
must  bear  the  additional  expense  of  settlement  in  a  remote  CSD.
National  restrictions  on  the  activities  of  primary  dealers  and  market-
makers are difficult to justify in the context of an integrated EU financial
system,  where  market  making  across  borders  will  become  the  norm.
Accordingly,  Member  States  should  re-consider  the  need  for  such
restrictions and take the necessary steps to remove them.

II.

Barriers related to taxation

Securities  are  liable  for  taxation  in  the  Member  State  where  they  are
held,  creating  the  potential  for  problems  in  the  holding  and  transfer  of
securities  across  borders  due  to  unfamiliarity  with  national  tax  regimes
and  the  risk  of  double  taxation.  In  light  of  the  previous  discussion  of
barriers related to technical requirements and market practice, it is clear
that  much  of  the  difficulty  associated  with  taxation  of  cross-border
securities  holdings  could  be  eliminated  by  allowing  investors  the
freedom to choose the preferred location of their securities. In this way,
investors  could  choose  to  pay  taxes  under  their  preferred  regime.
However, even if choice of securities location were to be made available,
it is likely that some investors would still hold their securities in the local

33 A primary dealer is a dealer in government securities, who is recognised by the
authorities and often given special responsibilities and privileges. A market-maker is a
dealer, who regularly quotes bid and offer prices.
34 An example of this type of rule is to be found in Belgium, where primary dealers are
strongly recommended to hold securities in the automatic bond lending pool of the
settlement system operated by the Belgian central bank.
35 Settlement is also undertaken in multiple domestic systems for the international bond
trading systems such as Brokertec and Euro MTS.

50

In particular, national
restrictions on the cross-
border activity of primary
dealers and market –
makers should be removed.

As securities are liable for
taxation where they are
located, problems arise
due to unfamiliarity with
national tax regimes and
the risk of double taxation.

market and so would continue to face problems with national differences
in the relevant tax regimes.

Three  types  of  securities  taxation  have  been  identified  as  sources  of
barriers  to  cross-border  securities  trading  within  the  EU.  These  are  the
withholding  tax,  capital  gains  tax  and  transaction  taxes  such  as  stamp
duty. In the majority of cases, these taxes have a general impact on the
efficiency of a cross-border transaction and are not specifically relevant
to  the  clearing  and  settlement  of  that  transaction.  This  report  focuses
primarily on the minority of cases in which taxation of securities creates
barriers  to  efficient  cross-border  and  settlement.  However,  as  a  matter
of  record,  those  tax-related  barriers  with  a  broader  impact  on  cross-
border securities transactions are listed in Box 5.1.

Barrier 11: Domestic  withholding  tax  regulations  serving  to

disadvantage foreign intermediaries

Withholding  tax  relief  can  be  granted  in  two  ways.  Relief  may  be
provided at source, with a reduced rate or exemption applied directly to
the  tax  payment  made.  Relief  may  also  be  granted  by  refunding  the
excess  withholding  tax  on  the  basis  of  a  reclaim  by  the  investor.  The
clear  preference  of  investors  is  for  at-source  relief,  which  is  offered  by
the  withholding  agent  (normally  a  bank  or  other  financial  institution).
the  majority  of  Member  States  restricts  withholding
However, 
responsibilities  to  entities  established  within  their  own  jurisdiction  and
thereby  disadvantages  foreign  intermediaries  in  their  capacity  to  offer
at-source  relief.  Even  in  those  Member  States,  which  allow  foreign
entities  to  assume  withholding  tax  collection  obligations,  a  local  fiscal
representative  must  be  appointed  to  discharge  the  foreign  entity’s
withholding  obligations.  The  need  to  use  a  local  agent  or  to  appoint  a
local  representative 
in  the  discharge  of  withholding  obligations
represents  a  significant  extra  cost  for  foreign  intermediaries  relative  to
local  providers.  To  ensure  a  level  playing  field  in  the  provision  of
withholding  tax  services  in  the  context  of  an  integrated  EU  financial
system, it should  be  possible  for  all  financial intermediaries  established
within  the  European  Union  to  act  as  a  withholding  agent  in  all  of  the
Member States. To this end, it would be necessary to ensure – probably
by means  of  an  international  agreement  -  that  each  Member  State  can
recover fully any tax receipts due from another Member State.

Barrier 12: Transaction  taxes  collected  through  a  functionality
integrated into a local settlement system

Taxation  of  securities  transactions  can  be  a  barrier  to  efficient  cross-
border  clearing  and  settlement  if  the  applicable  tax  provisions  or
administrative  practice  require  collection  via  a  functionality  that  is
integrated  into  a  local  settlement  system.  In  these  circumstances,  the
foreign investor's choice of provider for securities settlement is reduced
because it is necessary to link up with the local settlement system that
operates the tax collection functionality. This may damage cross-border
activity  to  the  extent  that  a  more  efficient  choice  for  the  particular
investor is unavailable. If the said investor were to link up with another
settlement system he could be  faced with transaction taxes at a higher

51

National differences in
regimes for withholding
tax, capital gains tax and
transaction taxes are the
main sources of problems.

Foreign intermediaries can
be disadvantaged in their
capacity to offer at-source
relief from withholding tax
and a level playing field
should be provided in this
respect.

Requirements that
transaction taxes be
collected through a
functionality integrated into
a local settlement system
should be removed.

rate and might not be able to claim exemptions from the said tax or only
under unfavourable conditions. For reasons of efficiency in cross-border
securities  and  to  ensure  a  level  playing  field  between  domestic  and
foreign investors, Member States should review any provisions requiring
that  taxes  on  securities  transactions  be  collected  via  local  systems  and
take the necessary steps to remove such provisions.

Box 5.1:
Tax-related barriers impacting more generally on the efficiency
of cross-border securities transactions

Several  tax-related  barriers  have  been  identified  as  impacting  more
generally on the holding and transfer of securities across borders rather
than  on  the  clearing  and  settlement  process.  While  these  barriers  are
not  a  specific  focus  of  this  report,  they  are  relevant  to  the  broader
debate  on  the  efficiency  of  cross-border  securities  transactions  within
the EU. In this regard, the main barriers can be listed as follows:

•

Inconsistent and unnecessarily complex national rules and
procedures in applying the withholding tax.

Withholding  tax  regimes  that  apply  to  securities 
income  vary
significantly  between  Member  States  and  between  different  types  of
securities  within  each  Member  State.  In  consequence,  compliance  with
the  rules  and  procedures  surrounding  withholding  tax  can  be
burdensome  for  investors  wishing  to  engage  in  cross-border  securities
transactions.  Complications  in  the  application  of  withholding  tax
procedures preclude automation across clearing and settlement systems
and  typically  involve  very  extensive  manual  intervention,  usually
through a local intermediary.

• National differences in the granting of withholding tax relief

A fundamental difficulty in the granting of tax relief to the investor is the
absence  of  a  standard  legal  definition  of  beneficial  owner  for  specific
transaction types. The complexity involved in identifying the legal nature
of  the  owners  of  securities,  their  liability/eligibility  for  exemptions  and
the  specificity  of  double  taxation  arrangements  affects  the  owner's
entitlement  to  reclaim  withholding  tax  paid  on  securities  income.
Inevitably  the  need  to  obtain  local  expertise  requires  the  use  of
intermediaries. Local expertise is also necessitated by different national
procedures 
(e.g.
documentation,  timing  of  refunds,  period  for  claiming  relief).  A  further
problem  that  can  arise  is  the  risk  of  double  taxation  in  cross-border
investments. Although most of the Member States have bilateral treaties
to avoid double taxation (mostly harmonised on an OECD model agreed
in  the  early  1960s),  there  are  no  common  procedures  for  claiming  tax
treaty  benefits,  such  as  relief  from  withholding  tax.  The  risk  of  double
taxation  often  remains  even  if  relief  is  claimed  under  domestic  tax  law
provisions.

from  withholding 

for  obtaining 

relief 

tax 

52

• Onerous  capital  gains  tax  reporting  requirements  on  foreign

intermediaries

Differences in national capital gains tax regimes raise the cost of cross-
border  transactions  because  manual  intervention  -  and  the  services  of
an  intermediary  -  is  required  in  the  process  of  applying  the  relevant
collection  procedures.36  A  particular  difficulty  can  arise  when  a  capital
gains  tax  regime  imposes  specific  tax  collection  or  tax  reporting
obligations on foreign intermediaries.37 Such requirements may make it
impossible  or  uneconomical  for  foreign  intermediaries  to  hold  the
relevant securities or force them to impose holding restrictions on their
customers so as to avoid taxable or reportable transactions. In addition,
national  capital  gains  tax  regimes  often  restrict  certain  non-trading
entities  (i.e.  entities  that  hold  large  numbers  of  securities  long-term)
from  lending  securities,  if  the  domestic  tax  legislation  treats  a  loan  of
securities  as  a  sale  for  tax  purposes.38  As  a  result,  market  liquidity  is
less than might otherwise be the case.

• Transaction taxes reducing market liquidity

Transaction  taxes  can  be  a  barrier  to  cross-border  securities  trading  to
the  extent  that  it  reduces  the  liquidity  of  markets.  This  situation  would
arise where the tax applies to either stock lending and/or taking title to
securities  as  part  of  collateral  arrangements.  For  example,  several
Member  States  apply  a  transaction  tax  on  the  transfer  of  securities,
whether  by  way  of  sale,  loan  or  collateral  arrangements.  In  some
instances,  a  transaction  tax  is  applicable  to  activities  other  than
purchases/sales  of  securities  and  imposes  costs  to  the  investor  as  he
takes (legitimate) evasive action.

• National tax authorities are not always  focused on the needs

of foreign investors

National tax authorities are not always sufficiently focused on the needs
of  foreign  investors.  As  tax  procedures  can  be  complex  and  raise
interpretation  questions,  easy  access  to  national  tax  authorities  is
essential.  Often,  language  problems  and  a  lack  of  orientation  to  the
needs of the foreign-based taxpayer complicate communication between
foreign  intermediaries  and  the  domestic  tax  authorities.  Additional
difficulties  exist  where  the  regional  tax  office  of  the  issuer  of  the
securities handles withholding tax relief claims.

36 The risk of double taxation is less than in the case of the withholding tax, as most
bilateral tax treaties address the risk of double taxation of capital gains on the purchase of
shares, securities and derivatives by non-residents.
37 Examples of such difficulties include (i) a national requirement for computation of
capital gains tax at the time of settlement for individual transactions, imposing a costly
administrative burden on foreign operators in an environment where securities are held
through multiple tiers of custodians, central securities depositories and other financial
intermediaries; and (ii) the imposition of a minimum custody period on certain securities,
which are then heavily taxed if this obligation is breached.
38 In Greece, for example, lending securities will generally be treated as a disposal for
capital gains tax purposes, unless the borrower retains physical possession of the securities.
In France, only certain forms of stock loan are ignored for capital gains tax purposes.

53

III. Barriers relating to legal certainty39

Legal  barriers  that  relate  to  cross-border  clearing  and  settlement  may
be  divided  into  three  types.  First,  there  are  legal  rules  that  inhibit
competition,  for  example  rules  that  impose  on  market  users  an
obligation to clear and settle through a particular system or restrictions
on  membership  of  systems.  Second,  there  are  differences  in  tax  laws.
These types of legal barriers have been dealt  with in  the  previous  sub-
sections.  The  third  type  of  barriers  reflects  the  existence  of  different
legal  rules  defining  the  effect  of  the  operation  of  a  system,  including
different  legal  structures  concerning  securities  themselves.  This  type  of
barrier is of a different order to the others. Barriers of market regulation
and of tax can generally be changed or abolished without affecting basic
legal  concepts.  However,  laws  about  what  securities  are  and  how  they
may  be  owned  form  a  basic  and  intimate  part  of  the  legal  systems  of
Member  States,  and  to  change  them  will  have  many  ramifications.
Barriers related to legal certainty trouble securities settlement systems,
clearing systems, and market intermediaries equally.

The  national  legal  systems  relating  to  the  nature  of  and  dealings  in
securities  have  evolved  to  reflect  the  specific  socio-economic  culture  of
each Member State. In consequence, there is substantial diversity in the
legal  treatment  of  securities  across  the  EU.  While  the  law  may  be  well
understood  by  participants  in  any  one  national  market,  the  scope  for
complexity  and  uncertainty  in  the  legal  treatment  of  securities  where
more  than  one  jurisdiction  is  involved  leads  to  an  inevitable  lack  of
clarity  for  all.  Problems  of  legal  complexity  are  set  to  intensify  as
securities  transactions  increasingly  involve  more  than  one  jurisdiction.
This  is illustrated  by  the  following  quotation  from  the  BIS  CPSS/IOSCO
Consultative  Report  on  Recommendations  for  Securities  Settlement
Systems  (January  2001),  which  refers  to  at  least  18  separate  legal
systems,  any  one  of  which  may  affect  the  analysis  of  a  cross-border
transaction.

“The legal framework for an SSS must be evaluated in the
relevant jurisdictions. These include the jurisdiction in which the
system and its direct participants are established, domiciled or
have their principal office and any jurisdiction whose laws govern
the operation of the system as a result of a contractual choice of
law. Relevant jurisdictions may also include a jurisdiction in
which a security handled by the SSS is issued, jurisdictions in
which an intermediary, its customer or the customer’s bank is
established, domiciled or has its principal office, or a jurisdiction
whose laws govern a contract between these parties.”

Whenever  there  is  a  difference  of  treatment  between  two  jurisdictions
concerning  a  particular  security,  there  will  be  uncertainty  about  which
claims  to  own  that  security  will  prevail.  This  legal  uncertainty  can  be

39 In identifying legal barriers, many respondents to the questionnaire argued that common
EU principles are needed for the authorisation, supervision and capital adequacy of clearing
houses. Common principles were seen as ensuring a level playing field for clearing houses
and as minimising the risk of regulatory arbitrage among market participants. This issue
will be taken up in the context of the Group’s second report, which will examine the
prospects for EU clearing and settlement infrastructure.

54

Barriers relating to legal
certainty are of a different
order to the others, as they
cannot be removed without
affecting basic legal
concepts.

National legal systems
relating to the nature of
and dealings in securities
have evolved to reflect the
specific socio-economic
culture of each Member
State, resulting in
significant diversity across
the EU.

Uncertainty created by
national differences in the
legal treatment of securities
can be exacerbated if
foreign investors are
obliged to use local
infrastructure for clearing
and settlement.

exacerbated by the fact that foreign investors are sometimes obliged to
use  local  infrastructure  for  clearing  and  settlement.  Uncertainty  is
increased  still  further  by  the  fact  that  securities  themselves  are  legally
legal
in  their 
complicated,  not  homogeneous,  and  vary  widely 
characteristics. Three particular dichotomies should be mentioned:

(i)

(ii)

(iii)

Equities  are  very  different  from  debt  securities.  Equities  are
creations  of  national  legislative  regimes.  Every  EU  corporate
can only issue shares under and in accordance with the law of
its country  of incorporation. No matter where and  how  these
shares  are  traded,  or  rights  in  them  traded,  one  can  never
completely  escape  from  the  national  regime  that  created
them. Debt securities, by  contrast,  can be issued with a  free
choice as to form, terms and conditions of the debt, including
where it falls to be paid, and what is its governing law.

Some  EU  legal  systems  recognise  in  certain  circumstances  a
difference  between  ownership  of  a  security  outright  and  an
entitlement against a settlement system (or intermediary) to
own such a security. Others treat the two as the same.

Some  debt  securities  are  physical,  but  most  are  not.  Bonds
may  be  constituted  by  physical  paper  (either  held  by
investors,  or  immobilised).  They  may  consist  of  interests
recorded in an accounting system that are deemed to replace
physical papers. They may be issued in a fully dematerialised
form,  and  recorded  in  the  books  of  a  system,  or  of  an
intermediary, or recorded in a register.

The  language  used  to  describe  the  legal  aspects  of  securities  trading
sometimes  disguises  the  level  of  complexity.  For  example,  it  is
commonly  said  that  securities  may  be  transferred  between  any  of  the
Member States. Whilst this is normally true of ownership rights, in many
cases the securities themselves do not move at all.  It is also often said
that  each  security  has  one  location.  In  fact,  where  securities  consist  of
several  different  rights,  holders  may  have  a  right  not  only  against  the
system  through  which  the  security  is  cleared  (in  one  jurisdiction)  but
also  against  the  issuer  (in  another).  Market  participants  rarely
understand  the  complications  that  may  arise  because  of  differences  in
national  laws  applying  to  securities.  The  risks  associated  with  legal
certainty  are  rarely  if  ever  acknowledged  or  accommodated  in  the
transaction.  Often,  participants  are  not  overly  concerned  by  the  legal
aspects  of  a  cross-border  transaction  by  reason  of  believing  that  they
are  effectively  insulated  from  such  considerations  by  using  local
intermediaries for transferring and/or holding the securities. Participants
only become aware of the risk when a problem with enforcing ownership
claims actually arises.

Barrier 13: The absence of an EU-wide framework for the

treatment of interests in securities

This barrier (and barrier 15) arises directly from the fact that in modern
markets  the  law  fails  to  keep  pace  with  developments  in  market
practice.  In  essence,  modern  practice  co-locates  securities  with  the

55

Given the complexity of the
issues involved, market
participants rarely
understand the
complications that may
arise because of the
differences in national laws
applying to securities.

systems  through  which  they  are  settled.  The  law  has  yet  to  catch  up.
Furthermore, EU Member States have different concepts of property and
ownership  (often  disguised  by  the  use  of  expressions  such  as
‘proprietary rights’ and ‘rights in rem’ as if they had a meaning common
to all EU legal systems.) The absence  of an EU-wide framework for  the
treatment  of  interests  in  securities  (including  procedures  for  the
creation, perfection and enforcement of security) has been identified as
the most important source of legal risk in cross-border transactions.

The absence of an EU-
wide framework for the
treatment of security
interests has been
identified as the most
important source of
legal risk in cross-
border transactions.

Differences  in  the  legal  treatment  of  securities  have  recently  been
analysed most deeply in the context  of  collateralisation (i.e.  techniques
by  which  securities  are  provided  to  cover  exposures  arising  in  financial
market  transactions).  Lawyers  divide  collateralisation  techniques  into
transfers  of  full  ownership  (as  happens  when  as  security  is  sold)  and
pledges (i.e. grants of security interests in securities). Pledge techniques
being  more  complicated,  they  reveal  in  greater  emphasis  the  legal
problems created by different concepts of property and ownership. If the
laws of two countries concerning how to pledge securities were identical,
it  would  be  irrelevant  which  were  used.  Since  national  laws  are  not
identical within the EU, it is crucial not only to identify which law applies
(dealt  with  in  barrier  15),  but  also  to  comply  with  its  pledging
requirements. If the pledging requirements are not satisfied, the pledge
may be insecure, or even invalid.

The  legal  strength  of  a  pledge  (or  sale)  of  securities  is  not  usually  in
question  if  the  system  or  intermediary  through  which  they  are  owned
becomes insolvent. Across the  EU, there is  a  uniformity  of  approach  as
to  segregation  of  clients'  assets  from  proprietary  assets.  As  long  as
there  is  proper  segregation  of  assets  (a  question  simply  of  keeping
orderly records), there is no issue that the securities do not form part of
the assets available to creditors  of the insolvent system.  However,  it  is
the  issue  of  whether  the  securities  in  question  actually  belong  to  those
in whose names they were held, which creates problems. In reality, this
is  an  issue  of  finality,  i.e.  whether  a  transfer  of  securities  from  A  to  B
made by accounting entry is final. In every national legal system within
the  European  Union,  there  are  (different)  rules  that  detract  from  what
might appear to be the finality of a transfer. These rules generally serve
the  purpose  of  protecting  creditors  (by  bringing  back  into  the  pool  of
assets  available  for  creditors  securities  that  were  transferred  out  just
before  the  onset  of  insolvency)  or  victims  of  dishonesty  (by  returning
assets to their rightful owners.

Transfers of money through payment systems were ring-fenced from the
application of such rules by the Settlement Finality Directive, in order to
ensure  the  legal  strength  and  pan-EU  legal  uniformity  of  EU  payment
systems.  It  has  been  forcefully  argued  that  a  similar  protection  is
needed for transfers of securities. The Settlement Finality Directive does
deal with securities settlement systems, but in a way that falls short  of
it  covers  only  designated  systems,  not
full 
intermediaries, and provides a ring-fence against claims of creditors, but
not rightful owners. Steps towards finality for transfers of securities are
seen  in  recent  EU  legislative  initiatives  (referred  to  in  barrier  15).
However,  these  initiatives  (a)  are  limited  to  securities  when  used  as
collateral  and  (b)  have  been  promoted  on  the  basis  that  they  will  not
dispossess victims of dishonesty. True  finality for transfers  of  securities

finality, 

that 

in 

56

Differences in the legal
treatment of securities
are most evident in the
context of
collateralisation.

Problems with legal
certainty in
collateralised
transactions relate to
questions about the
actual ownership of the
securities concerned.

Steps towards finality for
transfers of securities
are seen in recent EU
legislative initiatives.

requires law reform that addresses securities in any context, not merely
when used as collateral, and that overrides rules protecting creditors or
victims of dishonesty. Such reform would, however, give the impression
of advantaging market participants over others.

Barrier 14: National  differences 

in  the 

legal  treatment  of

bilateral netting for financial transactions

The  principle  that  mutual  obligations  arising  in  financial  market
transactions may be netted has been accepted throughout the  EU. This
arises in some countries as a natural feature of their legal system (e.g.
Germany  and  the  UK)  and  in  some  by  virtue  of  specific  legislation
passed for the purpose (e.g. Spain and France). Where netting has been
introduced  by  such  legislation,  its  availability  is  normally  limited  to
specific  products,  types  of  counterparty  or  forms  of  contractual
documentation.  This  leads  to  the  need  for  detailed  analysis  of  the
relevant  features  of  a  transaction  before  it  can  be  safely  assumed  that
netting  will  be  available.  This  can  be  the  case  even  where  the  parties’
agreement  that  there  should  be  netting  is  established  in  market
standard documents in respect of which formal legal opinions have been
obtained  (usually  by  the  trade  association  which  has  sponsored  the
document  in  question).  The  legal  difficulties  of  netting  have  been
somewhat eclipsed in recent months by the debate concerning the need
for  reform  of  the  law  surrounding  the  use  of  securities  as  collateral.
Nonetheless,  there  seems  to  be  consensus  among  market  participants
that  the  removal  of  all  remaining  legal  uncertainties  as  to  netting  is
necessary,  especially  if  multilateral  netting  schemes  are  to  be
established  in  the  context  of  clearing  systems  (for  the  legal  efficacy  of
multilateral  schemes  presupposes  the  efficacy  of  each  constituent
bilateral relationship).

Barrier 15: Uneven application of national conflict of law rules

Since  almost  all  transactions  involve  some  cross-border  element,  the
laws  of  more  than  one  jurisdiction  are  almost  always  relevant,  and
therefore  an  examination  is  required  of  the  extent  to  which  each  legal
system  recognises  the  validity  of  the  laws  of  the  other.  The  possible
permutations  in  which  this  question  of  conflicts  of  law  arises  can  be
daunting. However, it is helpful to identify  the  core  conflict  that  causes
problems  and  which  recent  legislative  initiatives  seek  to  address.  It  is
where securities that are the subject matter of a transaction have been
admitted into a settlement system and are duly recorded in its accounts.
As  mentioned  above,  some  EU  legal  systems  treat  as  different  the
ownership  of  a  security  outright  and  an  entitlement  (against  a
settlement  system  or  intermediary)  to  own  such  a  security.  Others
elevate  such  an  entitlement  to  being  equal  to  ownership  of  the
underlying security. Where legal systems of both types are in play, there
can an irreconcilable conflict. It seems to be unanimously accepted that
only legislation can resolve this problem.

Recent legislative initiatives concerning the use of securities as collateral
seek to address this type  of conflict. These initiatives involve  measures
intended to promote (in those legal systems where it is not already the

57

There is consensus that
the removal of legal
uncertainties as to
netting is necessary,
especially if multilateral
netting schemes are to
be established in the
context of clearing
systems.

National differences in
the legal definition of
ownership of a security
can cause difficulties in
the application of
conflict of law rules.

Recent legislative
initiatives seek to
address this type of
conflict by promoting
an entitlement against a
settlement system or
intermediary in respect
of a security to a status
equivalent to the
security itself.

However, this solution
is not uncontroversial…

case)  an  entitlement  against  a  settlement  system  or  intermediary  in
respect of a  security to  a  status  equivalent  to  the  security  itself.  These
measures  use  the  notion  of  location.  In  circumstances  where  the
security itself might under any other law be ‘as issued’ (i.e. the physical
paper  held  by  investors,  or  immobilised,  or  recorded  in  any  account  as
being held on behalf of the system), it is deemed instead to be located
in  (i.e.  to  be  the  entitlement  against)  the  system.  The  elegance  of  this
solution is that the same deeming mechanism can be used in respect of
‘lower-tier’  accounts,  so  that  the  same  rule  can  be  applied  to
intermediaries, in respect of entitlements against them recorded in their
own  accounting  systems.  The  application  of  the  same  solution  to  each
and every level of accounts has prompted the name PRIMA (the Place of
the Relevant InterMediary Approach) for this solution. For each account
holder,  the  Relevant  Intermediary  is  the  next  one  up  in  the  chain,  and
the  security  is  deemed  to  be  the  claim  against  that  intermediary,  and
thus  subject  to  the  legal  system  of  the  place  where  the  account  is
held.40 The legislative mechanism described here has the strong support
of  most  financial  market  participants.    It  lies  at  the  heart  of  (i)  the  EU
Settlement  Finality  Directive  (but  applied  only  to  securities  offered  as
collateral  to  central  banks  and  to  settlement  systems  themselves);  (ii)
the  proposed  EU  collateral  directive  (but  applied  only  to  securities
offered  as  collateral);  and  (iii)  the  proposed  Hague  Convention  (to  be
applied to all jurisdictions acceding to the convention).

The  solution  is  not  uncontroversial,  however.  Three  comments  may  be
made to assist putting it in perspective.

•

First, the solution is based  on  a  multiple legal  fiction  (an  account  is
deemed  to  have  a  place,  in  which  the  claim  against  a  system  or
intermediary is deemed to be the security).

• Secondly, the solution has the effect not only of deeming a security
to  have  a  particular  location  in  one  jurisdiction,  but  (of  necessity)
also  of  ‘dislocating’  it  from  another.  The  rights  of  owners  of  that
security (e.g. to reclaim securities dishonestly transferred away from
their  ownership)  will  be  altered  from  those  arising  under  one  legal
system to those under another. If those rights were better under the
law  of  the  former,  the  owners  will,  by  the  ‘dislocation’,  be
disadvantaged.

This  factor  should  not  allow  the  necessary  law  reform  currently  in
train to be derailed. Whilst such reform may in certain circumstances
(but not  the  generality  of  cases)  favour  systems  and  intermediaries
over  the  investors  on  whose  behalf  those  intermediaries  act  when
there is a dispute about ownership of the securities, the reforms are
needed  in  order  to  establish  sound  legal  underpinning  for  existing
market  practices.  Indeed,  the  reforms  may  be  seen  merely  as
recognition that the securities market (intermediaries and settlement

40  This  solution  pre-supposes  that  the  location  of  every  account  is  knowable.  For
settlement  systems,  this  is  unlikely  to  raise  problems.  However,  when  applied  to
intermediaries  that  maintain  accounts  for  investors  and/or  other  intermediaries  on  an
international basis, the location of an account (and thus the deemed location of a security)
may not be obvious. To solve this, it has been proposed to allow the intermediary and the
account-holder to agree where the location (and thereby the security) is deemed to be.

58

systems)  is  of  equal  systemic  importance  to  (or  even  part  of)
payment  systems,  for  which  the  Settlement  Finality  Directive
established legal soundness by way of ‘finality’ in 1997.

•

Thirdly,  the  solution  preserves  the  applicability  of  all  15  EU  legal
systems,  albeit  in  an  altered  constellation,  implying  a  need  for
participants to retain expertise in all 15 legal systems.

Moreover,  the  proposed  solution  is  not  the  ‘global’  standard.  Other
possible  approaches  include  the  creation  of  a  new  type  of  security
interest  (as  under  Chapter  8  of  the  Uniform  Commercial  Code  in  the
U.S.A.),  the  adoption  of  a  model  collateral  law  (as  in  certain  emerging
markets)  or the creation  of  a  new  collateral instrument.  These  kinds  of
solution all identify a specific activity and then create a separate regime
that  is  ring-fenced  from  the  rest  of  the  law  in  each  state  where  that
activity  is  to  take  place.  Such  an  approach  was  considered  by  the
European  Financial  Markets  Lawyers  Group  (EFMLG)  in  its  Proposal  for
an  EU  Directive  on  Collateralisation in  June  2000.  However,  the  EFMLG
rejected  proposing  any  legislation  that  would  comprehensively  change
the  legal  characteristics  of  taking  securities  as  collateral.    The  EFMLG
noted  that  the  creation  by  legislation  of  a  special  area  of  commercial
activity,  protected  from  the  application  of  national  insolvency  laws,
might  be  the  optimal  solution  for  the  international  financial  markets  as
they operate within the European Union. However, such a proposal was
considered  to  be  too  far-reaching,  and  not  something  that  is  likely  to
find immediate favour with the Member States.

IV.

Conclusion

In  considering  the  barriers  to  efficient  cross-border  clearing  and
settlement,  a  distinction  can  be  drawn  between  those  barriers  that  can
be removed  by  concerted  action  among  market  participants  and  others
that  can  be  removed  only  by  government  intervention.  In  this  context,
there  is  a  consensus  within  the  Group  that  the  EU  clearing  and
settlement  landscape  could  be  significantly  improved  by  market-led
convergence  in  technical  requirements/market  practice  across  national
systems.41  This  would  provide  for  inter-operability  between  national
systems  and  could  allow  for  a  choice  of  systems  to  be  used  at  each
stage  of  a  securities  transaction.  In  other  words,  trading  platforms,
stock exchanges and their participants would be better able to interface
with  a  variety  of  settlement  systems,  allowing  market  participants  to
choose  to  settle  transactions  in  their  preferred  locations.  Clearing
systems and CCPs could also develop a capability to operate settlement
in  various  locations.  While  direct  remote  access42  to  national  clearing
and  settlement  systems  is  already  technically  possible,  many  of  the
listed barriers remove it as a practical option.

41 Particular benefit could be gained by (i) implementation of real-time settlement in (and
between) depositories; (ii) harmonisation of operating hours; and (iii) full dematerialisation
of physical securities where possible under existing laws.
42 Direct remote access can be defined as the ability to participate in or use the facilities of
system located in another Member State, without the need to have legal presence in that
Member State.

59

… and there are
alternatives, such as the
approaches adopted in
the United States and in
some of the emerging
economies

Convergence in the
technical requirements for
and market practices in
clearing and settlement
across the EU seems
feasible.

Market-led  convergence  in  technical  requirements  and  market  practice
for  clearing  and  settlement  could,  therefore,  deliver  considerable
benefits  within  a  significantly  shorter  timeframe  than  that  required  for
full system mergers. User agreements and/or market conventions could
be  used  to  achieve  convergence  in  most  of  these  areas,  allowing  the
national authorities to concentrate on removing the other barriers in the
fields  of  taxation  and  legal  certainty.  However,  the  need  for  EU
legislation  to  remove  technical/market-based  barriers  cannot  be  ruled
out  entirely.  Such  intervention  could  prove  unavoidable  as  a  means  to
overcome national sensitivities and/or the perverse incentives that exist
for  entities  that  profit  by  arbitraging  inefficiencies  in  cross-border
clearing and settlement.

On the other hand, the removal of barriers related to taxation is a clear
responsibility  of  the  public  sector.  As  already  indicated,  many  tax-
related  barriers  would  lose  relevance  in  the  event  that  investors  were
free  to  choose  the  location  of  their  securities  holdings  –  and  by
extension to choose their preferred tax regime. However, there remains
a  convincing  argument  in  favour  of  harmonising  the  procedures  for
collecting and refunding tax receipts in respect of securities as a further
means to facilitate the integration of EU financial markets.

… and could deliver
considerable benefits
within a significantly
shorter timeframe than that
required for full system
mergers.

National governments are
responsible for the removal
of tax-related barriers and
should take the necessary
action.

Barriers  related  to  legal  certainty  reflect  more  fundamental  differences
in the concepts underlying national laws and would appear more difficult
to remove than barriers in the  other  categories.  Nevertheless,  a  partial
solution seems to be available in the proposed EU Directive on collateral
management. National governments should ensure the  earliest possible
adoption of this Directive and its rapid transposition into national law.

Barriers related to legal
certainty are difficult to
remove but could be eased
by the proposed EU
Directive on collateral
management.

60

Annexes I-VI

61

List of Participants in Giovannini Group
Discussions on Report

43

Annex I

Mr. Alberto Giovannini, (chairman) 

Unifortune Asset Management SGR 

Mr. Alastair Ballantyne
Mr. Fred Barnes
Mr. Emilio Barone 
Mr. Danilo Battistelli
Mr. Marc Bayle
Mr. Clive Bergel
Mr. John Berrigan 
Mr. Graham Bishop
Mr. Niall Bohan
Mr. Lars Boman 
Mr. Christophe Bourdillon
Mr. Gilles Breyse 
Mr. Tony Buche 
Mr. John Burke
Mr. Hervé Carré 
Mr. James Chrispin
Mr. Kjeld Christensen
Mr. Nicholas Collier
Mr. Joe Corcoran
Mr. Paolo D’Amico
Mr. Clifford Dammers
Mr Godfried De Vidts
Mr. Olivier Dudoit
Mr. Edward Duncan
Mr. Darren Fox 
Ms. Christa Franke
Ms. Christine Gerstberger
Mr. John Gilchrist
Mr. Paul Goldschmidt
Mr. Jean Granoux
Mr. Wim Hautekiet
Ms. Marye Humphery
Ms. Henny Kapteijn
Mr. Elias Kazarian
Mr. Pen Kent 
Mr. Andrew Lamb
Mr. Karl Lannoo
Mr. Giuseppe Lazzari
Mr. Mattias Levin
Mr. Mc Ging
Mr. Ramón Martínez
Mr. Paul Mercier

Morgan Stanley Dean Witter
Oxera
San Paolo IMI
Cassa di Compensazione e Garanzia
European Central Bank
Bergel International Consultant LLC
European Commission
GrahamBishop.com
European Commission
European Commission
CDC IXIS Private Equity
CDC IXIS
Clearstream International
London Clearing House
European Commission
PriceWaterhouseCoopers
VP (Denmark)
INSTINET
Barclays PLC
Banca di Roma
IPMA
Fortis Bank
Euonext
Goldman Sachs International
European Securities Forum
Deutsche Börse
European Commission
REGEN Sarl
European Commission
Crédit Agricole
Clearstream International
Morgan Stanley
ABP Investments
European Central Bank
European Securities Forum
London Clearing House
CEPS
Monte Titoli S.p.A
CEPS
European Commission
Banco Bilbao Vizcaya Argentaria SA
European Central Bank

43 Participants in the Group’s work do so in a personal capacity and not as representatives of their
institution or organisation.

62

Mr. Marko Mrsnik
Mr. Eugenio Namor
Mr. Jose Maria Narvaez 
Mr. Ivan Nicora
Mr. Kudwig Niessen
Mr. Albert Nijenhuis
Mr. Patrick Poncelet
Mr. Yves Poullet
Mr. Simon Powell 
Mr. Gregor Pozniak
Mr. Antonio Pulido 
Mr. George Richardson
Ms. Daniela Russo
Ms. Delphine Sallard
Mr. Michael Sammons
Mr. Stephan Schuster
Mr. Hugh Simpson
Mr. Al-Harith Sinclair
Ms. Valentina Stadler
Mr. John Tanner 
Mr. Martin Thomas 
Mr. Frederik Von Dewall
Mr. Charles Vuylsteke
Mr. Paul Watkins
Mr. John Watson 
Mr. Edward Wells
Mr. David Wright
Ms. Elizabeth Wrigley 
Mr. George Zinner 

European Commission
Banca Commerciale Italiana
Iberclear
Euroclear Bank
Wiener Börse
European Commission
European Banking Federation
Euroclear France
Deutsche Bank
Fed.of Europn. Securities Exchanges
BBVA SA
Goldman Sachs International
European Central Bank
European Commission
Goldman Sachs International
Deutsche Bank AG
CRESTCo
European Securities Forum
Hypovereinsbank
London Stock Exchange
Financial Law Panel
ING
Clearstream International
Clearnet/Euronext
European Commission
London, Stock Exchange
European Commission
European Commission
Oesterreichische Kontrollbank

63

Annex II

Mandate for Working Groups on
EU Cross-Border Clearing and Settlement

It is proposed to establish three working groups on EU cross-border clearing and
settlement  in  the  markets  for  equities,  bonds  and  derivatives.  There  will  be  a
common mandate for each of the working groups, which will have three parts:

i.

to  analyse  the  current  situation  (including  institutional  set-up)  for
cross-border clearing and settlement in the market concerned.

For  this  part  of  the  mandate,  it  will  be  necessary  to  differentiate  between  the
various  functionalities  involved  (i.e.  clearing,  settlement,  depository)  while
explaining  clearly  the  linkage  between  them.  These  functionalities  are  market
services,  provided  in  an  environment  that  is  characterised  by  rules  (of  a
regulatory, legal and fiscal nature), contracts and technology. The objective of the
analysis will be to clarify how these services are provided across borders and how
provision  is  affected  by  differences  in  the  rules  applied,  in  the  contractual
relations  involved  and  in  the  available  technology.  In  this  context,  the  analysis
should  be  supplemented  by  canonical  examples  that  would  highlight  the  main
difficulties in cross-border transactions.

More  specifically,  the  analysis  would  describe  in  detail:  (i)  the  existing
infrastructure  (legal,  technical  and  market  structure)  for  cross-border  clearing,
settlement  and  depository  functionalities  in  the  market  concerned  and  its
historical  evolution;  (ii)  the  governance  of  those  institutions  that  form  this
infrastructure;  (iii)  any  regulatory/legal/taxation  obstacles  that  exist  to  cross-
border  clearing  and  settlement;  and  (iv)  the  current  and  prospective  role  of
technology  in  providing  clearing,  settlement  and  depository  functions.  In
describing current arrangements, it would be useful to highlight aspects that may
be unique to the market concerned. (A questionnaire will be provided to assist the
working groups in their analysis.)

ii.

to consider the requirements against which the efficiency of possible
alternative  arrangements  for  clearing,  settlement  and  depository
services can be assessed

The efficiency of possible alternative arrangements for  each  of the functionalities
will need to be assessed on a consistent and objective basis. This can be achieved
most effectively by establishing a set of requirements for an efficient arrangement
for each functionality in each market. As the purpose of the Giovannini Group is to
inform  the  policymaking  of  the  Commission,  these  requirements  would  reflect  a
definition  of  efficiency  that  goes  beyond  the  narrower  interests  of  owners  and
users to include wider public-policy interests also. Many such requirements can be
identified  from  recommendations  made  in  the  report  of  the  CPSS-IOSCO  Joint
Task  Force  on  Securities  Settlement  Systems  (January  2001).  The  CPSS-IOSCO
recommendations focus on the settlement of intra-country trades and there is no
specific  consideration  of  cross-border  aspects.  Nevertheless,  on  the  basis  of  the
CPSS-IOSCO  recommendations,  a  set  of  requirements  for  efficiency  in  cross-

64

border clearing, settlement and depository arrangements can be established.
These requirements would include:

-

lower costs/better quality of service to users; 

adequate investor protection (e.g. the new arrangement would provide
clear  legal  framework  for  transactions,  minimise  investor  risks  at
various  stages  of  transaction,  ensure  full  transparency  of  investor
risks);

adequate competition (i.e. the new arrangement would assure fair and
open  access  to  potential  users  and  ensure  sufficient  incentive  to
innovate);

acceptable  level  of  systemic  risk  (e.g.  the  new  arrangement  should
offer  maximum  opportunity  for  netting,  should  provide  for  adequate
supervision and oversight)

governance arrangements (i.e. the new arrangement should be able to
reconcile interests of owners, users and public policy).

iii.

to  identify  some  possible  alternative  arrangements  for  clearing,
settlement and depository functionalities.

In  this  part  of  the  mandate,  the  objective  would  be  to  identify  a  small  number
(2 or 3)  of  possible  alternative  arrangements  for  clearing,  settlement  and
depository functionalities. A possible set of alternative arrangements would be (i)
a centralised pan-EU utility for clearing, settlement and depository functionalities;
(ii)  a  centralised  pan-EU  clearing  counterparty  with  multiple  settlement  systems
and depositories; and (iii) multiple vertically integrated clearing, settlement (and
depository)  "silos"  linked  to  ensure  pan-EU  coverage.  Each  of  these  alternative
arrangements  would  then  be  examined  so  as  to  illustrate  how  the  requirements
in (ii) would apply.

65

-
-
-
-
Annex III

An Alternative Perspective on the Cost Structure of Cross-
Border Settlement in the European Union

The  analysis  in  Section  4  of  the  report  focuses  on  the  additional  direct  cost  of
settlement  across  borders  relative  to  the  corresponding  services  for  a  domestic
transaction.  i.e.  the  extra  amount  paid  for  the  settlement  service  provided.  The
direct cost is, of course, only one element of the additional costs of cross-border
settlement. Other observable elements are the additional indirect costs associated
with  the  more  extensive  back-office  support  required  by  the  users  of  settlement
services  across  borders  and  the  need  to  employ  the  services  of  local  agents.
These indirect costs arise because of the absence of harmonised processes in the
various segments of the  EU market  (as  listed  in  Section  5).  Indeed,  most  of  the
substantial  differential  between  the  settlement  cost  in  using  an  ICSD  and  the
settlement  cost  in  using  a  national  CSD  –  as  identified  in  Section  4  –  can  be
attributed  to  the  fact  that  ICSDs  internalise  many  of  these  additional  indirect
costs on behalf of their clients.

While  the  additional  indirect  costs  of  cross-border  settlement  are  in  principle
observable,  a  detailed  analysis  would  require  access  to  the  managerial  accounts
of the investors and intermediaries concerned. However, tentative assessments of
the relative importance of the direct and indirect settlement costs in cross-border
transactions  have  been  provided  by  Euroclear  and  Clearstream  -  the  two  ICSDs
whose activities focus mainly on the settlement of cross-border transactions. Both
assessments conclude that the scale of direct costs of cross-border settlement is
small  relative  to  the  indirect  costs.  However,  the  implied  breakdown  of  costs
between  direct  and  indirect  sources  differs  substantially  between  the  two
assessments. This may be explained partly by the fact that they are grouping cost
elements  differently  but  the  wide  difference  also  suggests  uncertainty  about  the
size  of  different  cost  elements.  Accordingly,  both  estimates  are  reported  without
reconciling the analyses or choosing between them.

Chart A: Breakdown of Cross-Border Settlement Cost
(Euroclear)

%

70

60

50

40

30

20

10

0

Back Office

Local agents

ICSD

CSD

Indirect costs of cross-border

Direct costs of cross-border

66

Chart  A  presents  the  main  findings  of  Euroclear’s  assessment  of  cross-border
settlement costs.44 According to this assessment, the direct cost of a cross-border
settlement (i.e. the cost strictly linked to the settlement of the transaction by the
ICSD  and  the  national)  represents  only  4  per  cent  of  the  total  cross-border
settlement  cost.  The  bulk  of  the  cost  is  indirect  and  relates  to  the  need  to
maintain extra back-office facilities and to employ local agents. The breakdown in
the share of these indirect costs (which in many cases are  either  out-sourced by
using a global custodian or an ICSD) has been estimated as about 60 per cent for
additional back-office facilities and about 35 per cent for the use of local agents.

Chart B: Breakdown of Cross-Border Settlement Cost

(Clearstream)

Capital
inefficiency
15%

Risk
10%

Settlement
inefficiency
10%

Multiple-access
maintenance
21%

Intermediary
charges
14%

Transaction fees
10%

Custody fees
7%

Foregone interest
income
13%

Chart B presents the main findings of the Clearstream assessment of cross-border
settlement  costs.  The  Clearstream  assessment  differs  from  that  of  Euroclear
insofar  as  it  provides  estimates  for  the  less  observable  costs  of  cross-border
settlement  such  as  additional  risk  and  efficiency  losses.  According  to  the
Clearstream assessment, about 30 per cent of the total settlement cost is linked
to the services provided by CSDs or ICSDs; however, this share includes not only
costs  strictly  related  to  settlement  but  also  custody  fees  and  foregone  interest
income.  The  combined  cost  of  intermediaries  and  of  maintaining  multiple
interfaces with different settlement systems is estimated to be 35% of total. The
loss of settlement inefficiency is estimated at 10% of total cost, the loss of capital
efficiency is estimated at 15% and additional risk is estimated at 10%.

44 As Euroclear is a large customer of the local agents, the fees that Euroclear pays are likely to be
lower than the fees that smaller and more typical end-users pay. Euroclear’s systems are also likely to
be more complex and expensive, as Euroclear is dealing with several CSDs, markets and instruments.
Therefore, the costs faced by a typical end-user are likely to be more evenly divided between back-
office and local agents.

67

GIOVANNINI GROUP

Annex IV

Questionnaire on cross-border clearing and settlement
in the European Union

Name:…………………………………………………………………..……..……

Position:……………………………………………………………………………

Company:……………………………………………………………………..……

User group (investment bank, custodian etc.):………………………………….

Which market(s) do you focus on:………………………………………….……

Please forward your responses before 4th May 2001

by e-mail to:

c&squestionnaire@cec.eu.int

by fax to:

32.2.299.3503

by mail to:

European Commission,

Ms Triantafila Stratakis

Rue de la Loi 200 (Office BU1 02/39),

B-1049 Brussels

68

 
1.

Introductory remarks

In preparing a report on EU cross-border clearing and settlement arrangements, the

Giovannini Group has established three working groups. The working groups will

analyse the current situation in the markets for equities, fixed income securities and

derivatives, respectively. This questionnaire will assist the working groups in their

analysis.

The questionnaire focuses on market characteristics, potential obstacles to efficient

clearing and settlement across borders, and market/public priorities for

future

development of the clearing and settlement infrastructure. The questionnaire applies

only to transactions within the European Union and each of the questions should

be considered in relation to the particular market concerned. If appropriate, a separate

questionnaire should be completed in relation to each market.

It is important that the questions are answered as fully as possible and, where possible,

illustrated with specific examples. The questionnaire is provided for guidance and is

not meant to be exhaustive. Accordingly, respondents are invited to go beyond the

contents of the questionnaire when providing their analyses.

2.

Analysis of the current environment

2.1 Market characteristics

Table 1 (Page 10) should be completed with a view to identifying the defining features

of the market concerned. For example, is it a market where the transactions are

typically high value? What categories of institution are active in the market and what

is their geographical distribution? Are the exposures generated sensitive to market

movements? How long do such exposures typically last? Responses should relate to

the typical characteristics of markets in an orderly, efficient state, ceteris paribus,

rather than attempting - at this stage - to draw conclusions in terms of cross-border

clearing and settlement. (For example, the underlying purpose of a transaction may

69

call for intra-day settlement, but this might not currently be available in a cross-

border context.)

2.2

General considerations in cross-border clearing and settlement

a) When settling cross-border securities trades, which type(s) of arrangements are

most commonly employed in the relevant product area?:

• Direct membership by non-resident counterparty in settlement system of country

of security issuance;

• Reliance on local agent/custodian;
• Use of global custodian;
• Settlement through an ICSD;
• Reliance on links between CSDs;
• Other (e.g. bilateral settlement outside CSD/ICSD).

Where appropriate, please distinguish between arrangements used for the securities

and cash legs of transactions.

If your institution makes use of more than one of the

arrangements listed above, please indicate what factors determine the method used

(e.g. products involved, location of securities, location of counterparty, etc)

b) What, if any, are the additional risks (custody risk, operational risk, credit risk,

liquidity risk, legal risk) involved when undertaking cross-border transactions in the

products under consideration? Please describe the nature of these additional risks and

rank them in descending order of importance.

2.3

Obstacles to cross border clearing and settlement

When identifying obstacles or additional costs arising for particular instruments or

transactions or activities, please indicate which stage in the clearing/settlement chain

70

is (most) affected45, and whether barriers to cross-border clearing and settlement

of

securities

trades

are

surmountable/insurmountable.

If

such barriers

are

surmountable, at what cost? In your view, is legislative intervention needed or can

user agreements/market conventions be used to overcome these problems?

2.3.1 Market Practice/Technical

a) Please indicate which of the following factors represent a significant obstacle to

efficient cross-border settlement?

Obstacle

Minor cost

Major cost

Prohibitive

impact

impact

Definitions of securities themselves;

Issuance practice;

Application of voting rights;

Obligations of holders;

Status of overseas holders;

Variations

in standard settlement

periods;

Operating hours of systems

Timing

of

intra-day

settlement

finality;

Need to maintain membership of

multiple systems

Diversity of IT platforms, interfaces,

lack of STP;

Membership

and

information

requirements

Rules governing corporate actions

(including processing of dividend

payments, rights issues etc.).

Other (please specify).

45 i.e. whether the obstacle impacts at the level of central counterparty, netting, transfer of securities,

71

b) For which types of activities/transactions are the identified obstacles most

prevalent?

c) Which of the obstacles identified have their origin in legal provisions and which are

caused by variations in market rules, practices and standards?

2.3.2 Restrictions on choice of (settlement) systems:

a) Are respondents aware of any national listing/issuance/registration requirements or

stock exchange rules that restrict issuer’s choice of CSD from which securities can be

held/distributed/settled? If so, please specify the nature of such requirements/rules and

where they apply.

b) Are respondents aware of any national requirements and/or exchange rules that

require market participants (investment firms, inter-dealer-brokers, market-makers) to

use the offices of the clearing system/CSD of the exchange where the trade is

executed? If so, please specify the nature of such requirements/rules and where they

apply.

c) Do you consider either of

the above types of

restriction justified by

operational/efficiency or legal certainty considerations?

2.3.3 Remote Access46

a) What arrangements do host country central counterparties/clearing houses put in

place with regard to non-resident institutions (in respect of admission to membership,

capital adequacy controls, margining etc.)? In your view, do these arrangements

transfer of cash, custody, etc.
46 Article 15(1) ISD provides that “investment firms .. can, either directly or indirectly, become
members of or have access to the regulated markets in their host member states where similar services
are provided and also become members of or have access to the clearing and settlement systems which
are provided for the members of such regulated markets there.” The right to execute transactions on a
remote basis on a regulated market in another Member State has as a corollary, the right to benefit from

72

constitute a disproportionate or arbitrary restriction on access to these services for

non-resident institutions?

b) What arrangements do national CSDs/ICSDs put in place with regard to non-

resident institutions? Do these entail higher fees or other indirect costs for non-

resident

institutions? Do you consider access criteria transparent, fair and non-

discriminatory?

c) What steps does a non-resident institution have to take in order to be able to pay

cash against delivery of securities to its account in the host country CSD? Please

specify the category of institution referred to (bank, investment firm, etc).

d) Are non-resident institutions required to rely on the services of local custodians

and/or correspondent/settlement banks for indirect access to clearing and/or settlement

systems? If yes, does this entail significant extra costs?

e) Are there additional, technical difficulties relating to remote access (separate from

any legal/regulatory barriers)? If so, how significant are these and how can they be

overcome?

2.3.4 Legal certainty/collateral issues in cross-border trades:

a) For cross-border transactions, is there sufficient clarity about which laws govern

each stage of the transaction post execution up to settlement? Are cross-border

collateral transfer arrangements in respect of multilateral systems (CCP/clearing, SSS,

payment systems) now legally secure (perfectible/clarity on applicable law)? If not,

what is the nature of any remaining risk for these systems?

all central counterparty/clearing facilities, and to settle (including cash payment against delivery)
through host country CSD.

73

b) Which products and transactions are most exposed to legal uncertainty

regarding bilateral close-out netting? Would resolution of these uncertainties affect

market interest in use of multilateral clearing/netting arrangements?

c) Do national laws governing custody and transfer of securities impact on the ability

to hold and transfer securities abroad? In what respects? Are these laws appropriate

for dematerialised securities held by chains of

intermediaries and transferred

electronically?

d) Does the nature of the security involved (dematerialised or immobilised/ registered

or bearer) affect the complexity of undertaking a cross-border transaction? In what

ways?

2.3.5 Tax obstacles

a) Do national regimes for the application of withholding tax or withholding tax relief

differ between Member States? In what ways and for which classes of security? How

do these differences impact on the ability to hold and manage securities cross-
border?47

b) Do differences in capital gains tax regimes (thresholds etc) impact on the ability to

hold and manage securities cross-border?

c) Do transaction taxes (e.g. stamp duty) act as a deterrent to any types of transactions

or affect the location of business?

3.

Requirements for the future

3.1 Market priorities for future development of C&S infrastructure

Table 2 (page 11) should be completed to identify for each market what are the most

significant drivers for change to the current EU clearing and settlement infrastructure.

74

Please rank the factors in the left-hand column of each table in order of priority

for the market concerned (where 1 is your highest priority).

In other words, can the

greatest gains be made through risk reduction, or improved settlement times, or

greater legal certainty, etc?

The later categories in the table are intended to identify where the significant costs and

inefficiencies arise for each market in the current environment. These could include

for example:

•

•

•

dead-weight costs of cross-border settlement (measured by excess fees relative to

comparable domestic transactions).

back-office costs of having to interface with a number of different settlement

systems.

costs/inefficiencies resulting from factors such as inability to pool collateral in a

single location, delayed settlement, additional manual intervention or involvement

of intermediaries.

Please indicate whether your institution would also benefit from the ability to offset

margin requirements across products/markets.

3.2

Public policy priorities

The technical, cost and investor risk reduction aspects of future consolidation in

infrastructure for clearing and settlements cannot be considered in isolation. The next

set of questions addresses the potential public policy angles and externalities of any

future infrastructure model.

47 Differences could relate to the paperwork involved and information required (including whether it is
required once only or for every payment), whether there is tax relief at source or through refund, the

75

3.2.1 Competition and efficiency

a)

If legal and tax barriers to competition between clearing and settlement

infrastructures were eliminated, what

type of technical

improvements would be

required to enable this competition to take effect? Which structural arrangements

would be most propitious to the emergence of open competition?

b) Would you consider it appropriate to have competition between all types of

infrastructure providers, or are there countervailing arguments at any or all of the

stages in the clearing/settlement chain?

c)

In your view, is there a “business case” for system providers/users to undertake

the necessary investment to upgrade system linkages in the product area under

consideration? In other words, would the potential benefits outweigh the costs of

adaptation of systems?

3.2.2 Governance

a) How does the governance of institutions affect their ability to move towards a new

EU infrastructure? Do these considerations materially influence the case for

“profit”/non-profit” structures? Are the arguments different for central counterparties

and settlement systems/CSDs?

b)

In your view, should systems be owner-run or user-run? If the former, should

there be restrictions on those allowed to own infrastructure providers? If the latter,

what is the correct balance of large players vs small in management structures and

voting rights? If neither, what model should be used?

3.2.3 Risk profile of consolidated infrastructures

a) Are there any additional risks (or qualitative increase in existing risks) inherent in

a scenario where one or more large CCPs or centralised CSDs serve trading systems

across Europe? If so, please indicate the nature and significance of

these

period for which relief can be claimed, need to use local agent, etc.

76

additional/increased risks

(e.g. operational,

credit/counterparty,

liquidity,

systemic)? Please identify and prioritise for central counterparty and/or clearing,

settlement systems in your product area.

b) Please indicate how important you believe intra-day finality and/or delivery versus

payment are for the market(s) concerned.

If the answer is different for different

markets, please explain the reasons for that variation.

77

TABLE 1

CHARACTERISTICS OF THE SECURITIES MARKETS

(See Section 2.1 for background)

Equity Market Bond Market

Secured money

Derivatives

market

market

Typical value of a
trade*

Volume of trades*

Category of key

market players

Traditionally

domestic or

international market?

Volatility of credit

exposures*

Typical period of

exposure

Number of

participants

Number of issues

Standardisation of

products

Standard settlement

cycle / urgency (T+)

* Please provide a figure where possible, or indicate whether high or low.

78

TABLE 2

PRIORITIES FOR FUTURE DEVELOPMENT OF SECURITIES

INFRASTRUCTURE

Please rank in order of priority from your perspective (where 1 is highest priority)

Equity market Bond market

Secured

Derivatives

money market

market

Reduce counterparty risk

Reduce balance sheet

exposure

Reduce number of

settlement transfers

Offset margin requirements

in separate countries

Achieve post-trade

anonymity

Reduce legal risk

Harmonise market

conventions for cross-

border transactions

Reduce settlement periods

for cross-border
transactions48

Increase frequency of batch

settlement /need for real-

48 Please indicate whether intra-day finality in cross-border settlements is a priority for the market in
question.

79

time settlement

Reduce/remove manual

intervention in cross-border

settlements

Reduce involvement of

intermediaries in cross-

border settlements

Reduce/remove need to be

member of multiple CSDs/

use multiple custodians

Reduce settlement system

transaction and membership

fees

Reduce custody charges

80

 Annex V

RESPONDENTS TO THE QUESTIONNAIRE ON
EU CROSS-BORDER CLEARING AND SETTLEMENT
ARRANGEMENTS

49

ABN AMRO Management Services Limited, U.K.
APCIMS (Association of Private Client Investment Managers
and Stockbrokers), UK
Artesia Banking Corporation (Dexia Group), Brussels
BANK Austria AG/Creditanstalt AG
BARCLAYS, UK
BBVA, Spain
Banca IMI S.p.A., Italy
CDC IXIS, France
Central Securities Depository S.A., Greece
Citibank, N.A.
Clearstream
Crédit Lyonnais, Luxembourg
CRESTCO Ltd., UK
Credit Suisse First Boston (Europe) Limited, UK
Deutsche Bank AG, Germany
Dresdner Bank AG, Dresdner Kleinwort Wasserstein
EACH (European Association of Central Counterparty
Clearing Houses), Austria
Euroclear Bank
Euronext/Clearnet
Federation of German Cooperative Banks, Germany
Fortis Bank Brussels
Goldman Sachs International
Halifax plc, UK
Hamburgische Landesbank-Girozentrale, Germany
HEX Plc, Finland
HypoVereinsbank, Germany
IBERCLEAR, Spain
London Stock Exchange, UK
Morgan Stanley International Limited
Nomura International plc, UK
SANPAOLO IMI S.p.a., Italy
Société de la Bourse de Luxembourg S.A.
Société Générale, France
UBS AG, Switzerland
Værdipapircentralen A/S (The Danish Securities Centre)
VPC AB, Sweden

49 The names of two respondents have been withheld on request.

81

Annex VI

SUMMARY OF RESPONSES TO THE GIOVANNINI GROUP
QUESTIONNAIRE

I.

NUMBER AND ACTIVITY OF RESPONDENTS

The  questionnaire  (see  Annex  IV)  was  published  on  the  Commission  website  on
2 April 2001. In the following two months, a total of 38 responses were received
from  institutions  involved  in  all  stages  of  the  clearing  and  security  settlement
process and operating from various Member States. (The respondents are listed in
Annex V.) Chart A presents a breakdown  of  respondents  by  activity.  The  bulk  of
respondents  came  from  the  banking  sector,  i.e.  13  commercial  banks  and  12
investment  banks.  Responses  were  also  received  from  6  national  CSDs,  both  of

Chart.A : Breakdown of Respondents by
Activity

Stock Exchanges

Associations

ICSDs

Commercial Banks

CSDs

Investment Banks

the ICSDs, 4 stock exchanges and an association of investment managers.

II.

IDENTIFICATION OF BARRIERS

In  Section  5  of  the  report,  the  barriers  to  efficient  cross-border  clearing  and
settlement in the EU are categorised under three headings, i.e. those  relating  to
technical requirements/market practice, taxation and legal certainty respectively.
In all, 15 barriers have been listed under the three headings as follows:

Technical requirements/market practices

• Diversity of IT platforms/interfaces;

• Need to maintain multiple membership of settlement systems;

• National differences in rules governing corporate actions;

• Differences in the availability/timing of intra-day settlement finality;

•

Impediments to remote access;

82

• National differences in settlement periods;

• National differences in operating hours/settlement deadlines;

• National differences in securities issuance practice;

• Restrictions on the location of securities; and

• Restrictions on the activity of primary dealers and market-makers.

Taxation

• Withholding tax procedures disadvantaging foreign intermediaries; and

•

Tax collection functionality integrated into settlement system.

Legal certainty

• National differences in the legal treatment of securities;

• National differences in the legal treatment of bilateral netting; and

• Uneven application of conflict of law rules.

All of the respondents identified barriers in each of the three categories. All of the
15  individual  barriers  listed  (together  with  a  set  of  broader  tax-related  barriers)
were identified by at least one of the respondents to the questionnaire. However,
the  number  of  respondents  identifying  each  barrier  varied  significantly.  Chart  B
presents the distribution of responses across the 15 barriers in descending order.
The main conclusions to be drawn are:

a) The vast majority of the 15 barriers listed was identified by at least half of

all respondents to the questionnaire;

b) The category of barriers related to technical requirements/market practices
was  the  most  frequently  cited  by  respondents.  The  eight  most  frequently
cited  barriers  come  from  this  category.  Although  the  remaining  two
barriers  in  this  category  (i.e.  impediments  to  remote  access  and
restrictions  on  the  activities  of  primary  dealers),  were  less  cited  by
respondents,  this  may  reflect  the  fact  that  they  can  be  considered  as
specific cases of the other technical barriers. Moreover, the identification of
restrictions  on  the  activities  of  primary  dealers/market  makers  was
unprompted  since  such  restrictions  were  not  mentioned  explicitly  in  the
questionnaire;

c) The  prevalence  of  barriers  relating  to  technical  requirements/market
practices  among  those  identified  by  respondents  may  well  reflect  their
relative importance to market participants. However, it may also reflect the
extent  to  which  these  barriers  are  more  frequently  encountered  or  better
understood than those relating to taxation and legal certainty.

83

Chart B: Number of respondents per barrier

Diversity of IT platforms/interfaces

Multiple systems requirements

Securities issuance

Rules governing corporate actions

Location of securities

Variations in standard settlement periods

Timing of intra-day settlement finality

Operating hours/settlement deadlines

Domestic withholding tax regulations serving to disadvantage foreign intermediaires

Different laws about dealings in securities

Transaction tax collected through a functionality integrated into local settlement system

Different legal treatment of bilateral netting

Remote access

Uneven application of national conflict of law rules

Primary dealers activity

0

5

10

15

20

25

30

35

40

84

d) The most  frequently cited  barrier  was  diversity  in  IT  platforms/interfaces,
followed by the  requirement of multiple memberships of systems. Both  of
these were identified as a problem by more than 30 of the 38 respondents;

e) More  than  25  respondents  identified  differences  in  securities  issuance
practices, differences in the rules governing corporate actions, restrictions
on  the  location  of  securities,  variations  in  settlement  period,  the
availability  of 
in  operating
intra-day  settlement,  and  differences 
hours/settlement deadlines as barriers;

f) More  than  20  respondents  identified  restrictions  on  agents  for  the
withholding  tax,  differences  in  the  legal  treatment  of  securities  and  the
integration of the tax functionality into the CSD as barriers;

g) More  than  15  respondents  identified  differences  in  the  legal  treatment  of
bilateral  netting,  remote  access  and  differences  in  the  supervision  of
clearing and settlement as barriers;

h) Fewer than 15 respondents identified the remaining two barriers – uneven
application of national conflict of law rules and restrictions on the activities
of primary dealers/market makers as barriers.

III. Relative 

costs 

of 

barriers 

relating 

to 

technical

requirements/market practices

From  the  responses  to  the  questionnaire,  it  is  possible  to  ascertain  whether  the
10  barriers  related  to  technical  requirements/market  practice  are  perceived  as
imposing  a  major  or  a  minor  cost  on  users  of  cross-border  clearing  and
settlement  services.  Chart  C  presents  the  cost  assessment  of  respondents  for
each of these barriers. Responses to the questions on barriers related to taxation
and  legal  certainty  were  more  general  and  so  perceptions  of  the  relative  cost  of
these barriers are not so clear. The following main conclusions can be drawn from
Chart C:

(a) National  differences  in  information  technology/interfaces  and  the  need  to
maintain multiple membership of CSDs were not only the most frequently
cited barriers but were also among the barriers most perceived as a major
cost.  Of  those  respondents  citing  these  barriers,  94%  and  89%
respectively regarded them as a major cost.  Only impediments to  remote
access  –  which  was  cited  much  less  frequently  as  a  barrier  -  received  a
higher rating (100%) as a major cost to users.

(b) While  different  practices  in  securities  issuance  and  restrictions  on  the
location of securities were cited relatively frequently, only a minority (less
than 25%) of the respondents concerned perceive them as a major cost.

(c) In 

the 

contrast, 

technical
requirements/market  practice  were  less  frequently  cited  but  were  all
perceived  as  a  major  cost  by  more  than  50%  of  those  respondents
concerned.

remaining 

barriers 

relating 

to 

85

Chart C: Cost assessment of barriers relating to technical requirements
and market practice

Diversity of IT platforms/interfaces

Multiple systems requirements

Securities issuance

Restrictions on location of securities

Different rules governing corporate actions

Absence of intra-day settlement finality

Differences in standard settlement periods

Different operating hours/settlement deadlines

Remote access

Primary dealer restrictions

0

5

10

15

20

25

30

35

40

Major cost Minor cost

86

IV. PRIORITY OF BARRIERS

The  sequence  in  which  the  barriers  in  each  category  are  listed  in  Section  5
reflects  a  priority  rating  that  has  been  established  on  the  basis  of  responses  to
the  questionnaire.  In  respect  of  barriers  related  to  taxation  and  legal  certainty,
the  priority  rating  simply  reflects  the  number  of  respondents  citing  each  of  the
barriers concerned as indicated in Chart 5A. In respect of the barriers relating to
technical  requirements,  the  priority  has  been  established  by  combining  the
number  of  respondents  citing  each  barrier  with  the  relative  importance  attached
to the barrier in terms of cost.50 Chart D lists the barriers by priority under each
of the three headings.

50 Thus, the priority assigned to a specific barrier is based an index number which is derived as the
product of two percentages, i.e. the percentage of the 37 respondents that has cited the specific barrier
and the percentage of those citing the barrier who regard it as a major cost.

87

Chart D: Priority rating for barriers relating to technical requirements
and market practice

Diversity of IT platforms/interfaces

Multiple systems requirements

Different rules governing corporate
actions

Absence of intra-day settlement finality

Impediments to remote access

Differences in standard settlement
periods

Different operating hours/settlement
deadlines

Differences in securities issuance

Restrictions on location of securities

Primary dealer restrictions

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

88