Opinion of the European Economic and Social Committee on Financial integration: the case of European stock markets (own-initiative opinion)
Date: 2008-02-13
Institutions: European Economic and Social Committee
Subjects: economic concentration, financial market, financial transaction, stock exchange

C 162/96

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Official Journal of the European Union

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Opinion of the European Economic and Social Committee on Financial integration: the case of Euro-
pean stock markets (own-initiative opinion)

(2008/C 162/25)

On 16 January 2007 the European Economic and Social Committee, acting under Rule 29(2) of its Rules of
Procedure, decided to draw up an own-initiative opinion on:

Financial integration: the case of European stock markets

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible
for preparing the Committee's work on the subject, adopted its opinion on 24 January 2008. The rapporteur
was Mr Lehnhoff.

At its 442nd plenary session of 13 and 14 February 2008 (meeting of 13 February 2008), the European
Economic and Social Committee adopted the following opinion by 103 votes to 4, with 9 abstentions:

1. Conclusions and recommendations

1.1
The European Economic and Social Committee recom-
mends that the European institutions step up their efforts to
explain to the citizens of the EU the advantages that a harmo-
nised legal framework for dealings in securities would offer to
them. This will help counteract the still widespread ‘home bias’
that exists, where investors only invest in their own domestic
market.

The Committee recommends that the Commission pay
1.2
special attention in the ex-post evaluation of
the Financial
Services Action Plan (FSAP) announced in the White Paper on
Financial Services Policy (1) to whether the many changes that
have been made to the basic provisions of European law relating
to on- and off-exchange trading venues are conducive to any
meaningful integration of European stock markets and facilitate
cross-border capital investment.

1.4
The Committee thinks it is necessary to wait for this
evaluation process before taking any additional or supplemen-
tary steps to promote integration. If the EESC deems it necessary
it will come back with proposals to make progress on the inte-
gration of stock markets.

The 2005 communication on industrial policy (5)
1.5
announced seven horizontal
initiatives to support those of a
sectoral nature. The Committee feels that efficient and accessible
stock exchange markets at a cost that European companies,
particularly SMEs, can afford should be added to the list of
cross-sector measures. The MIFID Directive is supposed to
improve the operation of these markets, but an all-round reflec-
tion on the role they have to play in promoting European
competitiveness is essential because of the associated effects on
the financial markets. The Committee regrets that the mid-term
review of industrial policy (6) has not led to such a debate.

This applies above all to the impact of the Markets in
1.3
Financial Instruments Directive (2), the Prospectus Directive (3)
and the Transparency Directive (4) — which all feature as part
of the Financial Services Action Plan — and also to ongoing
efforts to facilitate the cross-border clearing and settlement of
transactions in financial instruments (in this case in particular
the implementation of the infrastructure operators' voluntary
commitment under the Code of Conduct
for Clearing and
Settlement and moves by the European Central Bank to establish
a uniform European clearing and settlement platform (Target2/
Securities)).

(1) http://ec.europa.eu/internal_market/finances/policy/index_en.htm.
(2) Directive 2004/39/EC of the European Parliament and of the Council
of 21 April 2004 on markets in financial
instruments amending
Council Directives 85/611/EEC and 93/6/EEC and Directive
2000/12/EC of the European Parliament and of the Council and
repealing Council Directive 93/22/EEC, OJ L 145, 30.4.2004, p. 1-44.
(3) Directive 2003/71/EC of the European Parliament and of the Council
of 4 November 2003 on the prospectus to be published when securities
are offered to the public or admitted to trading and amending Directive
2001/34/EC, OJ L 345, 31.12.2003, p. 64-89.

(4) Directive 2004/109/EC of the European Parliament and of the Council
on the harmonisation of transparency requirements in relation to infor-
mation about issuers.

Special attention should be paid to stock exchanges because of
their central role in any market economy. The activities of the
funds of sovereign issuers in emerging countries or countries
that are richly endowed in natural resources must be the subject
of a certain level of vigilance, particularly when they invest
massively in the stock markets, as has been the case with the
London Stock Exchange, where funds from Dubai and Qatar
now hold 48 % of the securities traded. Generally speaking, the
Commission should work together with the Member States and
the supervisory authorities to improve the transparency of these
funds, understand their motives and make sure they are not
pursuing political objectives. Generally,
‘the EESC would urge
the Commission to present, as soon as possible, its draft legisla-
tive provisions aimed at stepping up the information provided
by institutional investors with regard to their policies in respect
of investment and voting’ (7).

(5) COM(2005) 474 final:

Implementing the Community Lisbon
Programme: A policy framework to strengthen EU manufacturing —
towards a more integrated approach for industrial policy.
(6) COM(2007) 374 final: Mid-term review of industrial policy.
(7) ECO/202 — The economic and social consequences of financial
market trends — CESE 1262/2007 — OJ 2008/C 10/23 and INT/332
— Review of the Single Market — CESE 89/2007 — OJ 2007/C 93/06.

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2. Arguments to support the opinion

2.1 Opinion remit

2.1.8
For securities markets, such as those for bonds and
shares, it is extremely important to continue integration of the
infrastructures for clearing and settlement. The number of
inadequately integrated clearing and settlement systems is still
high.

Financial integration is a basic component of European
2.1.1
Economic and Monetary Union. Since the introduction of the
euro,
the European financial system has
become an important goal. Most studies agree that such integra-
tion clearly has positive effects on the European economy.

the integration of

In view of the substantial advantages that European
2.1.2
financial
the
integration can have for
present situation marked by insufficient integration of a number
of market segments requires an unwavering commitment from
all participants to continue this process until its completion.

the entire economy,

2.1.3
The creation of integrated, competitive and effective
financial markets is an essential element of the internal market
and the Lisbon goals, so that the advantages for growth and
jobs can be exploited fully.

fulfil

the major

financial centres

important public-service
2.1.4
All
role which they play on
functions. Because of
domestic financial markets, stock exchanges are often equated
with public institutions of national importance. The European
stock exchange sector is dominated by traditional and frequently
national actors. Despite some stock exchange mergers and alli-
ances this market is still split up into a dozen different financial
centres. However, the constraints and conflicts of a concrete
geographical
transactions being
performed electronically.

location are

avoided by

2.1.5
Financial integration is above all else a market-driven
process, though it also requires effective interaction between
market forces and the actions of public bodies. Moreover, state
authorities too in the EU must be firmly resolved to strengthen
the process of integration. This particularly applies to the imper-
turbable will of national and European authorities to use a legal
and regulatory framework that is designed to foster the integra-
tion of the internal market and financial stability.

2.1.6
The importance of European stock markets as a source
of business finance has grown over time, sometimes spectacu-
larly. A well developed stock exchange market will thus increase
aggregate investment and reduce costs. The stock market can
make a major contribution towards providing extra outside
resources. So, the financial sector is also important because it
resources, which enables other
ensures
branches of the economy to grow further.

the allocation of

The highly disparate national rules of

the financial
2.1.7
markets represent an obstacle. Stock exchange mergers alone —
as strategic aspects of financial adjustment — are not enough to
fulfil the political requirements of orderly harmonisation.

2.1.9
At a time when monetary union actually favours a
pan-European procedure for securities management, the conti-
nental European stock markets are in the paradoxical situation
of being computerised but still burdened with high transaction
costs. This contradiction is due mainly to the continuing exces-
sively high costs for cross-border transactions.

2.2 General comments — European stock markets

2.2.1
Stock exchanges (securities markets) bring together
supply and demand through financial instruments (i.e. they have
a market role). From an investor's point of view, stock exchanges
are forums for the buying and selling of financial instruments.
For companies,
stock markets are a key prerequisite for
acquiring both own and outside capital. Thus, alongside credit
financing by banks, stock markets are the central plank of entre-
instru-
preneurship funding through the issuing of
ments. Without properly working stock market
the
scope for the placement of new financial instruments would be
extremely restricted. The emergence of a genuine European
stock market can offer companies new possibilities for financing
their business activities by issuing securities. This also applies
for companies in countries where up to now stock trading has
shown little liquidity, so that issues can only be carried out with
limited success. In addition, a European stock market should
help investors to move away from the concentration that is still
evident on their respective home markets and profit
from
growth throughout the whole European Economic Area.

financial

trading,

However, at an overall

2.2.2
level, it should be noted that
companies fund only a small part of their investments (gross
fixed capital formation) from the stock markets. In addition, net
share issues are negative in the United States and zero in the
euro area. This cannot be explained by a variation in the
number of listed companies because this has not varied substan-
tially. But it may be due to the fact that companies buy back
their own shares with the aim of increasing their earnings per
share, which is the headline indicator on stock markets.

In order that stock exchanges might fulfil their public
2.2.3
role, two things are needed: (i) there must be a transaction (i.e.
trading); and (ii) the financial instrument must be exchanged for
clearing and settlement) (8).
its monetary equivalent
Although both aspects are needed for a stock exchange to func-
tion, the two — trading on the one hand and clearing and

(i.e.

(8) The English term clearing and settlement is also frequently used in

German.

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settlement on the other — are quite distinct operations and, in
point of fact, are also conducted on two different technical plat-
forms. Trading is organised by stock exchanges themselves,
is conducted through central
while clearing and settlement
counterparties (CCPs) and central securities depositories (CSDs).
The latter act as central facilities for holding securities and also
conduct book-entry securities transfers (9).

Each Member State has at least one stock exchange (10).
2.2.4
There are also multilateral trading facilities (MTFs) which, like
stock exchanges, bring together purchase and sale orders
through financial instruments and ‘internalisers’, who conclude
deals directly with their clients. Clearing and settlement
is
conducted largely through national CSDs, which for certain
services have a monopoly in their respective countries.

2.2.5
The large number of trading venues must not per se be
seen as detrimental to the European capital market. On the
contrary, effective competition between trading venues should,
as a rule, mean lower transaction charges for investors in a
market economy. It is therefore quite right that the Markets in
Financial Instruments Directive (MiFID) (11) should also seek to
boost competition between trading venues (12).

in fact,

However, competition among trading venues can only
2.2.6
work if European stock exchanges are,
in a practical
position to compete with one other. One obstacle to competi-
tion so far has been the so-called ‘concentration rule’ existing in
many Member States, whereby all orders have to be placed on
regulated markets — usually the local stock exchange. The
possibility of such a national settlement has been taken away by
the MiFID. A continuing obstacle to European competition may
be that, given their history as purely national institutions, indivi-
dual stock exchanges are able to offer only a limited, national
range of tradable financial instruments. Competition would be
impossible,
if a German stock exchange were
unable to trade in French financial instruments.

for instance,

However,

if the financial

instruments traded on the
2.2.7
major European stock exchanges are anything to go by,
it is
clear that, despite some potential legal barriers, there are no real
obstacles to competition among trading venues. For instance,
over 13 000 foreign financial
instruments are traded on
German stock exchanges (13). Even if comparable figures for
other stock exchanges are not available, this example clearly
shows that the conditions are in place for effective competition
legal obstacles become
between trading venues. Any national
less important with the implementation of the financial services

(9) These depositories also have other functions connected with holding

securities, e.g. corporate actions.

(10) A list of the various stock exchanges is given in the Commission's

presentation of regulated markets (OJ C 38, 22 February 2007).

(11) Directive 2004/39/EC (OJ L 145, of 30 April 2004, p. 1).
(12) Cf. MiFID, recital 34 and the market transparency provisions set out in

Article 27 et seq.

(13) Source: Deutsche Börse Info Operation, Total Turnover Foreign Shares,
March 2007 www.deutsche-boerse.com/dbag/dispatch/de/notescon-
tent/gdb_navigation/listing/50_Reports_and_Statistics/60_Order_-
Book_Statistics/INTEGRATE/statistic?notesDoc=/maincontent/
Monatsstatistik+auslaendischer+Aktien&expand=1.

action plan (FSAP). Thus, with the Prospectus Directive the
marketing of financial instruments throughout Europe is made
possible through a single prospectus. The MiFID harmonises not
only investor protection requirements, but also the rules for
operations and trading on stock exchanges and off-exchange
trading venues. Finally, the Transparency Directive standardises
capital market information. It will now be the task of the Euro-
pean institutions to assess the concrete impact of the new basic
legal conditions and correct any shortcomings. The aims of the
FSAP, particularly the cross-border organisation of
financial
markets, will be the yardstick here.

2.2.8
The question can be asked whether, in terms of quality,
competition between stock exchanges does not endanger price
determination mechanisms (and thus the public operations of
the exchanges) and whether this can be countered by a strict
promotion of consolidations. At first glance, this does seem
indicated, because of the dispersal of liquidity across a number
it does not necessarily
of different trading venues. However,
follow that price determination is any the poorer
simply
because there are so many trading venues in Europe. Trade
mechanisms, such as arbitrage trading, provide a counterbalance.
Moreover, trading venues have been subject to extensive harmo-
nised transparency requirements before and after trading since 1
November 2007 (MiFID, Article 27 et seq.). These are supposed
to ensure the comparability of prices at different trading venues
and thus counteract the fragmentation described earlier. As far
as can be judged shortly after the implementation of the MiFID
in the Member States, this approach seems to be working. Data
streams from OTC trades are published and consolidated with
the data from stock exchanges and MTFs by large financial infor-
mation service providers, such as Project Boat, a consortium of
influencing of
nine investment banks.
prices at different venues is ensured. Consolidations between
exchange owners are therefore not needed to boost liquidity.

In this way a mutual

2.2.9
Decisions for or against mergers or acquisitions are
rather — as even Commissioner McCreevy put it — simply
business decisions taken by the stock exchange operators, and
they should therefore be strictly market-driven. From a political
angle, the only important question is whether there are any
legal obstacles to mergers or acquisitions and,
if so, to what
extent these can be overcome.

and acquisitions among trading system
2.2.10 Mergers
operators are subject to the same legal hurdles as any other
mergers or acquisitions under company law. Current examples
— such as the planned acquisition of the Borsa Italiana by the
London Stock Exchange and the merger of the New York Stock
Exchange and Euronext — show this to be true even beyond the
European judicial area.

2.2.11
Particular legal difficulties may arise, however, in the
establishment of a common Europe-wide trading platform.

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Obstacles include differing listing requirements, trading prac-
tax provisions and accounting rules (14). No detailed
tices,
analysis has so far been conducted into the importance of these
obstacles, particularly in the wake of the adoption of the MiFID
and the Prospectus Directive. However, there is good reason to
doubt whether these obstacles are, in practice, so serious as to
be insurmountable. The case of Euronext — the successful
merger of the trading systems of the Amsterdam, Brussels, Paris
and Lisbon stock exchanges — and the merger of exchanges in
the Baltic and Nordic countries to form the OMX Nordic
Exchange bear this out. Moreover it is clear, even a relatively
short time after the adoption of the MiFID that, in future, stock
markets will be facing increasingly tough competition from
MTFs, which may be active in all Member States on the basis of
a European passport. Examples here are the ongoing Turquoise
initiative launched by seven investment banks and the Chi-X
platform launched by Chi-X Europe Ltd in London in March
2007. This suggests that greater integration of European stock
markets is not only possible, it should already have taken place
in the near future (15).

2.2.12
The promotion of stock market integration should
not, however, be misunderstood as a call for trading and settle-
ment venues to be concentrated on one commercial pan-Euro-
pean platform. It should not be forgotten that both the new off-
exchange trading platforms and the established stock exchanges
are businesses geared to making a profit, and a monopoly
would lead to worse conditions for issuers and investors (16).

2.2.13
The Committee recommends that the European insti-
tutions should look at alternatives to promoting integration
through competition if stock exchange concentration might lead
to access being made noticeably more difficult for regionally
active small and medium-sized firms. It should be remembered
that for small and medium-sized enterprises it is often easier to
gain access to a regional stock exchange than to the large Euro-
pean stock exchanges. Regional investors can be reached more
directly through a regional stock exchange because of the close
local connection. The actual developments to be expected
should therefore be assessed carefully and thoroughly to see
whether stock exchange access is made more difficult for small
and medium-sized enterprises. If this should be the case, a solu-
tion could lie in setting up one or more none-public stock
exchanges that are particularly committed to the interests of
small and medium-sized enterprises.

3. Specific comments — Clearance and settlement on

stock markets

3.1
The main obstacle to a more efficient European stock
exchange system, however, is felt to be not so much the tradi-
tional regional orientation of stock exchanges as the different
clearing and settlement arrangements within Europe. In the vast
majority of cases, these systems are organised along national
lines and this makes the cross-border clearing and settlement of

(14) McAndrew/Stefanadis, Current

Issues in Economics and Finance

(Federal Reserve Bank of New York), June 2002, 1.3 seq.

(15) See too ECB Monthly Bulletin November 2007, pp 67, 77 et seq.
(16) See too ECB Monthly Bulletin November 2007, pp 67, 74 et seq.

stock exchange transactions more difficult and expensive. (That
said,
the clearing and settlement arrangements in place for
purely national securities transactions often provide effective
and low-cost solutions that must not be ruined by any consoli-
dation.) A range of key initiatives is already in place to over-
come this fragmentation and thus to secure a more efficient
system for European clearing and settlement.

reports (17), which suggest

Barriers to effective clearing and settlement arrangements
3.2
stock exchange transactions have been identified and
for
analysed in the Giovannini
that
national differences exist in particular in relation to technical
standards and market practices and in the different national tax and
legal bases (18). In the first of these areas, infrastructure operators
and market participants (mainly banks), coordinated by the
European Commission within the Clearing and Settlement Advi-
sory and Monitoring Expert Group (CESAME), are currently
working to find solutions (19). Uniform practices, such as stand-
ard public holidays on which the clearing and settlement
systems are closed, are to a large extent already in place, while
work is currently under way to secure further standardisation,
for
instance in the clearance and settlement of corporate
actions.

3.3
Technical standards and market practices would also be
harmonised to a large extent if a current plan to set up a
Europe-wide platform for the clearing and settlement of securi-
ties transactions proves successful. In July 2006, the European
Central Bank (ECB) and the national central banks in the euro
area proposed a common European platform for the clearing
and settlement of securities transactions (20). Since, at a technical
level, this is linked to the existing Europe-wide payment plat-
form Target,
it has been dubbed Target2/Securities. In January
2007, the European Central Bank also published initial studies
on the economic, legal and technical impact of the planned plat-
form (21). The technical specifications for a system of this kind
are currently being developed in conjunction with users (22).

3.4
In the future, the ECB would like to see the Target2/Secu-
rities system cover all securities transactions cleared and settled
in central bank money. The planned platform is, in principle, to
be rolled out in a uniform way across Europe, thus significantly
simplifying cross-border securities clearing and settlement in
particular.

3.5
If successful, Target2/Securities would overcome critical
obstacles to cross-border securities clearing and settlement in
central bank money in Europe. Assuming various factors are in
place, this would also bring major cost benefits to the parties
conducting a securities transaction.

(17) Cf.

http://ec.europa.eu/internal_market/financial-markets/clearing/

communication_en.htm.

(18) For clearing and settlement, national rules for the transfer of owner-
ship, the posting of securities (deposit law) and insolvency law are
important.

(19) Cf.

http://ec.europa.eu/internal_market/financial-markets/clearing/

cesame_en.htm.

(20) Cf.

html.

(21) Cf.

html.

http://www.ecb.int/paym/market/secmar/integr/html/index.en.

http://www.ecb.int/paym/market/secmar/integr/html/index.en.

(22) Extensive information about this can be found on the European

Central Bank website (www.ecb.int).

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3.6
The European CSDs, the central counterparties (CCPs)
and the stock exchanges have also given the Commission an
undertaking that they will comply with a range of measures set
out in a code of conduct (23). The particular aim is to boost effi-
ciency and interoperability among infrastructure operators. The
costs of cross-border European clearing and settlement are
expected to fall as a result. The first wave of commitments
became operative at the start of 2007. Pricing has become more
transparent thanks to the undertaking to publish standardised
price lists, thereby making it easier for users to compare prices.
Infrastructure operators have also pledged to improve access to
their system and interoperability between systems. The manuals
published at the end of June 2007 enshrine this obligation to
such an extent that effective networking of systems is made
possible. Given the very favourable assessment of the develop-
ment of the Code of Conduct to date, and of its implementation
in the speech given by
in practice — as reflected, not least,

Commissioner McCreevy to the European Parliament on 10 July
2007 — it would appear that a sound method is now in place
to promote the cost-effective Europe-wide clearing and settle-
ment of securities transactions.

3.7
Other than the initiatives outlined above, there is no
need, from a policy perspective, for any additional action at the
moment to promote consolidation of the stock markets. For
it is important to await the conclusion of the various
now,
initiatives in place to help consolidate the European stock
exchange environment, particularly in the clearing and settle-
ment of
instruments, and then to
analyse their findings. If these moves prove a complete failure
or if they do not ultimately result in more efficient European
stock exchange trading, consideration could be given to whether
further regulatory measures might not be brought in to remedy
the situation.

transactions in financial

Brussels, 13 February 2008.

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS

(23) Cf.

http://ec.europa.eu/internal_market/financial-markets/clearing/

communication_de.htm#code.