Cicero Policy Briefer

Issue 1, June 2006

NYSE-Euronext deal ups ante on cross-border clearing and settlement

By Conor Foley

The NYSE-Euronext ‘merger’ has refocused the Commission’s attention on cross-border clearing and settlement, with the prospect that Brussels, tired of the industry’s failure to act, will move to regulate soon.

At issue are the costs of cross-border clearing and settlement within the internal market, with cross-border costs on average almost six times those of in-country costs. In 2001, the Giovannini Group, which advises the Commission on financial markets issues, identified this difference in costs as a major impediment to cross-border securities trading but suggested that changes to bring cross-border costs in line could be affected by the industry within two years. In the five years since this report, the industry has yet to make any significant progress addressing this issue.

Getting to the root of the problem, the Commission has identified exchanges that house trading, clearing and settlement under one roof (aka ‘vertical silos’) as the principal villains of the piece. These vertical silos include Borsa Italiana, Spain’s Bolsas y Mercados (BME) group and Deutsche Börse.

In a joint statement on 7 March, Commissioners McCreevy and Kroes warned Europe’s exchanges that unless swift action was taken by the industry to reduce the costs of cross-border clearing and settlement, the Commission would act to regulate change unilaterally, possibly before the Brussels summer recess.

The Commission’s warning followed a similar call issued by Mr McCreevy in September last year.

On 23 May, the Commission’s DG Internal Market released a draft working document on ‘post-trading activities’, which paves the way for an impact assessment should the Commission decide to progress with regulation.

Behind the scenes in Brussels, Europe’s leading investment banks have been lobbying the Commission hard to force the vertical silos to open their clearing and settlement operations. As those most active in cross-border trading, the banks stand to realise significant cost savings from new regulation that will reduce the cost of cross-border clearing and settlement.

French banks were particularly hostile to the prospect of Deutsche Börse taking control of Euronext for fear that the German giant’s vertical silo structure would raise clearing and settlement costs further. Recent press reporting on leaked internal documents suggested that the Commission agreed with this position.

Despite this opposition, Deutsche Börse’s bid for Euronext provided the Commission with leverage to force the biggest vertical silo to change its clearing and settlement arrangements by tying merger and acquisition approval to changes on clearing and settlement. Before the NYSE offer, indications were that Deutsche Börse had agreed to a number of changes sought by the Commission on its clearing and settlement practices subject to a deal with Euronext.

Yet with Deutsche Börse having lost out on Euronext, the Commission now has few other options bar regulation to force major changes on clearing and settlement. The European Parliament last summer signaled its support in this field, although its preference was for change to be market rather than regulation-driven. Watch this space for developments.

Conor Foley can be contacted on +32 (0) 2537 3058 or click here to email.