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Tony Freeman - Omgeo

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Ethereal Carrots and Vague Sticks

29 April 2008  |  3370 views  |  2

The real impact of the European Commission Code of Conduct for Clearing and Settlement has been somewhat patchy. Despite 60 organisations – representatives of Europe’s stock exchanges, clearing houses and securities depositories – declaring their allegiance to the Code in a letter sent to Charlie McCreevy at the end of last year there appear to be intact barriers to open-access and interoperability.  

Recent news that LCH Clearnet, who originally championed the Code, would not open themselves to the UK because of obstacles to implementation of the initiative and a lack of reciprocity among rival clearers and exchanges only proves to illustrate the divide that the Code is causing throughout Europe. 

The following question then must be asked: if the code of conduct doesn't produce the desired results what sanctions are really in place to take the strain? At present there are ethereal carrots and vague sticks, and a back-up plan, if any, for the Code being unsuccessful is all a bit vague. 

While calls for regulation could be brought into effect by the Commission if the code of conduct fails to achieve the necessary changes across Europe, this approach will be prone to a number of problems – none more so than the elections in June 2009 for a new European Commission to be appointed and the probability that new Commission members will have different ideas, desires and opinions to those currently in office. 

While the comparable industry bodies in Europe do not command the same might as their US counterparts – not surprising, given the breadth of disparate market practices and infrastructures that any pan-European organization needs to span – there is an argument for an industry body stepping up and taking the reins on implementing the Code ahead of changes to the Commission next year. If anything, at least this would give market participants the faith that unlike so many pan-European initiatives before, there is a structure and plan in place for progression and they won’t be left just guessing.

Comments: (3)

Elton Cane - Independent - Brisbane | 29 April, 2008, 15:59 Do you think DTCC taking over LCH Clearnet would cause further divide in the industry? Would other clearing and settlement operations implement more defensive strategies to protect their business in the face of a new transatlantic dominant competitor?
Paul Penrose - Finextra - London | 29 April, 2008, 17:13

What kind of industry body are we talking about here? Industry-led efforts to sort out post-trade processes in the past have had mixed results. Look at Isitc and the ill-fated GSTPA. The G30 is yesterday's news. Even Swift, the standard-bearer in the payments space, has struggled to make its mark in securities. This is a deeply divided cross-border market dominated by powerful vested interests. Legislation, in the form of an EC-mandated Directive may be the only solution.

Tony Freeman - Omgeo - London | 01 May, 2008, 19:58 I'm certainly not advocating the revival of GSTPA! What the US has is a very strong culture of cooperation through trade associations. SIFMA and ISITC North America are good examples. In Europe the BVI in Germany is similarly effective - it has a large professional staff and it leads the market in developing new processing models. The European Commission, the ECB, CESR and many other key stake-holders view Europe as a single market. But they face a multitude of trade associations and lobbyists which mostly represent individual countries. The banking segment does have national and European trade associations - but the securiities market isn't yet at the same stage. The recent integration of ESF (European Securities Forum) into SIFMA Europe is a positive sign that the market is learning that it needs a cohesive voice - but I think a directive is becoming more and more likely.
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Tony Freeman

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Head of Industry Relations

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