Code of Conduct to have limited effect on European clearing - Celent

Key findings of the report include:

• The Code of Conduct has already started to impact the cost of post-trade services, and Celent expects that it will continue to drive down the clearing cost. This should benefit exchanges because they will see their trading volume increase. For cross-border transactions, the cost related to CCP clearing is dwarfed by the cost of the settlement process. Most market players are doubtful about the wider impact of the Code of Conduct on the European post-trade infrastructure, despite clearing cost reductions. CCPs will reduce their prices until they approach or are close to the switching cost of market participants.
• The majority of requests made for interoperability will not succeed. The reasons for failure will not be technical but rather will have to do with non-viable business models, resistance from incumbents, etc. Celent estimates that there are a limited number of CCPs that can operate in a profitable manner on the trading feeds on a single trading venue. Therefore, while trading venues have received numerous letters of intent from CCPs to access their trading feeds, it is doubtful that all of them will be finalized. Due to challenges posed by interoperability, Celent does not expect to see foreign CCPs challenging local ones before 15 to 18 months from now.
• The Code of Conduct could lead to change in the post-trade infrastructure, either through vertical integration or consolidation. The final outcome of the Code of Conduct will take years to determine. Most market participants believe that the CoC will have little effect on the European clearing infrastructure, except for a reduction of clearing cost. There are many reasons for this, notably the limited scope of the CoC to cash equities (excluding derivatives, which create more challenges in terms of clearing services), the existing links between local CCPs and the financial institutions that generate the majority of volume, and the expensive switching costs. Celent estimates that we should not expect to see consolidation in the European post-trade market reach its final stage before 2020.
• The United Kingdom, followed by Germany, will see the fiercest competition because the barriers to entry are limited compared to other European markets such as France and Italy. This distortion of barriers to market entry should be addressed by the EU commission to ensure fair competition.
• Financial institutions expect more from T2S compared to the CoC. End customers believe that the post-trade cost of cross-border equity trading has more to do with settlement than clearing; therefore many banks are waiting for Target 2 Securities to be implemented rather than the Code of Conduct.
• Local regulations and tax policies jeopardize the impact of the CoC. The lack of harmonization among European markets could force CCPs that want to access a new market to develop a specific platform for that purpose. This situation would prevent CCPs from achieving economies of scale and therefore reduce their ability to drive down cost even lower. Fair competition does not exist at a European level, and some countries will be easier for entrants to penetrate than others (e.g, U.K vs. Italy).