Opinion of the European Economic and Social Committee on the Communication from the Commission to the Council and the European Parliament: Clearing and Settlement in the European Union — The way forward (COM(2004) 312 final)
Date: 2005-02-10
Institutions: European Economic and Social Committee
Subjects: capital market, drafting of EU law, securities, stock-exchange transaction, tax system

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Official Journal of the European Union

8.9.2005

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

(COM(2004) 312 final)

(2005/C 221/21)

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

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

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

1. Introduction

As part of

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

their choice;

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

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

cost-effectiveness

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

2. Current situation

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

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

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

itself

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

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

Cross-border transactions can take place in different

2.3
ways according to the following alternatives:

— direct remote access to the foreign Securities Settlement

System;

— use of a custodian having direct or indirect access to the

foreign Securities Settlement System;

— use of an international CSD having direct or indirect access

to the foreign Securities Settlement System.

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

2.4
would be easy to conclude that,
grated, competitive and safe market,

From what has been said in the previous paragraph, it
in order to create an inte-
it would be enough to

the

and internationalise

adopt common standards, harmonise legislation and taxation,
and rationalise
structures. The
Committee warns against simplistic optimism; solutions that
might seem easy in theory must be carefully assessed against
the current situation of a Europe made up of 25 countries,
which differ profoundly in size and in economic weight. In the
Union as a whole, there are 24 CSDs, of which just two deal
with 32.2 % of the number of transactions and 60.4 % of their
total volume; 14 of the 25 countries do not have clearing struc-
tures (CCP). Moreover,
in the EU15, settlement with central
bank money far exceeds settlement with commercial bank
money, accounting for 67 % of both the number and volume
of transactions.

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

3. General comments

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

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

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

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

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

Two of

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

tion authorities. A directive setting out the details by which
these conditions could be fulfilled would be welcome, not to
say necessary.

As already stated above,

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

intermediaries

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

3.8
In view of the operational characteristics of each player,
investors have a direct interest in the reliability and sound-
ness of operators; the market, on the other hand, is based on
the reliability and soundness of the intermediaries. Whilst
the systemic risk is common to operators and intermediaries,
the checks carried out on each of them need to be different in
approach. Hence the need, mentioned in point 3.5 above, to
maintain distinct roles and rules. As far as the CSDs are
concerned, it is worth noting that the credit risk of the partici-
pants (which are, for the most part, financial
institutions) is
practically non-existent, since the laws of Member States
protect investors against the insolvency of a CSD by requiring
that securities held in custody do not appear on the partici-
pants' balance sheets.

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

this stage that

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

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

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

that

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

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

— the notion of an open market must be tempered by the

concern not to impair its quality,

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

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

characteristics

4. Specific comments

4.1 The obstacles identified by the Giovannini reports

The two reports of the Giovannini (1) group form the
4.1.1
basis of the Commission's deliberations; the findings of these
reports are the result of the work of authoritative experts, who
command complete confidence. However, whilst the facts as
there
stated are indisputable,

the Committee believes that

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

remains some margin for further discussion on the opinions
expressed. Therefore, the following comments are made in a
constructive spirit.

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

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

too,

settlement

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

systems must have

4.2 Absence of a common regulatory/supervisory framework

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

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

safe and which ensure a level playing field among the
different providers of these services.
It proposes to achieve
these aims by adopting appropriate measures and policies on:

— liberalisation and integration of existing clearing and
rights of access and

systems, ensuring full

settlement
removing barriers;

— full implementation of competition rules;

4.3 Absence of a level playing field

— the adoption of a common regulatory and supervisory

framework;

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

— implementation of appropriate governance arrangements.

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

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

In conclusion,

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

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

stance on structural

issues;

it

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

5. The Commission's objectives

5.1
The Commission's objective is the creation of EU Securi-
ties Clearing and Settlement Systems that are efficient and

The Commission's declaration of

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

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6. The Commission's initiatives

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

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

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

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

— monitor effective compliance with competition rules,
and further

verifying ‘existing monopoly positions
industry consolidation intervening when necessary’.

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

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

risks over which the authorities themselves have no
control. These concerns are legitimate. The exchange of infor-
mation is not always satisfactory, but above all,
information
may not be up-to-the-minute, which would be a prerequisite
for timely intervention.

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

consolidation, mergers,

6.3.3
The growing sophistication of the markets and the
and corporate
sustained pace of
changes, mean that supervision authorities have a heavy work-
load. Theoretically, there is no doubt that cooperation measures
are appropriate and sensible. The Committee is concerned,
however, that in practice, significant difficulties will emerge:
it will not be easy to integrate twenty-five systems with varying
levels of efficiency, resources and experience. It believes that
the date of entry into force of the liberalisation measures
must be set after the unconditional agreement of all the
national supervisory authorities. These will have to ensure
in a responsible manner that they are in a position to partici-
pate in the system of information exchange and to guarantee
the protection of markets from systemic risk.

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

6.3.1
The Committee agrees in principle with the Commis-
sion's aim, but nonetheless wishes to introduce a note of
caution. Not all of the barriers that currently exist are due to
the protectionist concerns of national authorities;
in many
cases the intention is mainly to protect the market against

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

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

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

It is unclear how,

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

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

‘discrepancies

6.5.1
It is widely accepted that solving the innumerable and
complex legal problems will take a long time. Realistically, the
fact of the matter is that national peculiarities and bureaucratic
conservatism have often given rise to impediments and obsta-
legislative harmonisation. The
cles to the process of
Committee hopes that,
for once, Member States' sense of
responsibility will prevail over national interests. The Commis-

sion proposes to set up a group consisting of academic
experts, public authorities and practising lawyers, which will
have the task of looking in greater depth at the analyses started
by the Giovannini group and to suggest appropriate solutions.
The group will have to keep up contacts with the bodies that
have undertaken similar work at global level (UNIDROIT). The
Committee suggests that the group include technical and legal
experts from among the operators.

The process of

intervening at the legal

legislative harmonisation that

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

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

6.6
Competition policy (point 4 of the Communication):
the Commission document gives particular attention to this
issue, and establishes an important principle: measures
aimed at liberalising and integrating systems and competi-
tion policy complement each other. This principle might
seem obvious, but once put into practice might lend itself to
different interpretations, particularly of the restrictive variety.
The Commission states that it wants to remain neutral on
the question of horizontal or vertical consolidation, but
warns that competition-related problems might arise when
such consolidations lead to the creation or strengthening of a
dominant market position, as is already the case. The problem
is not the dominant position, which is not illegal per se, but
illegal use of the dominant position: if this were to happen,
given the nature of the market, it could create problems with
applying the rules.

8.9.2005

EN

Official Journal of the European Union

C 221/133

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

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

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

Brussels, 10 February 2005.

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

7. Conclusions

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

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

is that of

if anything,

The problem,

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

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

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND