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‘Foot dragging’ must not cause Code of Conduct to fail Back  
Charlie McCreevy’s ‘Code of Conduct’ is opening up the market for clearing and settlement, says Pierre Francotte chief executive officer of Euroclear, in an exclusive interview with FINANCE. The ‘Code of Conduct’ which will help to liberate European competition in the post-trade services must succeed to avoid a prescriptive Directive that would slow progress for the industry. Francotte discusses Euroclear’s plans of a Single Platform with the aim of creating a ‘domestic market for Europe’ and looks at other issues in the post-trade environment such as Target2-Securities & the Giovannini Group barriers.
Is Commissioner McCreevy’s Code of Conduct succeeding in opening the market for clearing and settlement?
Yes. Commissioner McCreevy’s ‘better regulation’ approach to marshalling Europe’s capital markets is already starting to have an impact. In our domain of clearing and settlement, the self-regulatory Code of Conduct has already given investors greater transparency and is in the process of opening up access to more European clearing and settlement service providers.
Pierre Francotte

We believe that the Code of Conduct is capable of leading to lower cross-border transaction costs through competition and user choice more quickly than a Directive could have achieved. We acknowledge and agree with Commissioner McCreevy’s recent warning that ‘endless foot-dragging, be it by incumbent infrastructures or their regulators, is not going to be accepted.’ If the necessary reforms and abolishment of protectionist behaviour are not forthcoming quickly, there will again be calls for a prescriptive Directive, which could slow down the momentum built up so far.

The Euroclear group has a well-established record, dating back to well before the Code, of providing access to external parties. For example, in the past few years Euroclear UK & Ireland has granted access to eight trading, clearing and settlement service providers (LCH.Clearnet, x-clear, Eurex Clearing AG, European Multilateral Clearing Facility, London Stock Exchange, Irish Stock Exchange, SWX Europe and Chi-X). Euroclear Bank has more than 35 links with domestic capital markets worldwide and, since the Code was put in place, has made requests for access to the German, Italian and Swiss clearing providers.

In turn, Euroclear entities have received access requests from other parts of the infrastructure. We expect that the Code will deliver its objectives, if ‘foot-dragging’ is curbed.

What is the Euroclear Single Platform and what benefits will it bring to the market?
Our Single Platform is the foundation for a borderless European capital market in the back offices of financial institutions raising capital and investing in Europe. Our primary goal is to reduce cross-border transaction costs and risks by building one processing platform to replace five. At the same time, we are harmonising operating practices within Ireland, Belgium, France, the Netherlands and the UK so that each of these markets resemble each other operationally. About €1 billion of excess costs a year can be attributed to settlement infrastructure fragmentation and inefficiencies that the market can address itself. Once our Single Platform is fully functional, we will reduce these excess costs by €300 million every year. Were this approach to be extended across Europe, the savings would grow to €700-800 million. This is an environment where cross-border trades would cost barely more to settle than domestic trades, and where investors would have access to much deeper pools of liquidity.
This is what we call a ‘domestic market for Europe.’

Euroclear expects to complete this business model by 2011. The first phase, the Single Settlement Engine (SSE), was fully implemented in 2006/early 2007. The second phase, known as ESES (Euroclear Settlement of Euro-zone Securities) will be completed in November 2008. It is effectively a full-service platform for all Belgian, Dutch and French securities transactions, delivering a single settlement solution for these three markets. It also supports NYSE Euronext’s Single Order book for the settlement of domestic and cross-border transactions emanating from the bourses of Amsterdam, Brussels and Paris.

Euroclear has already started the third and final phase of consolidating custody, settlement and collateral management services onto the Single Platform, which will extend this domestic market concept to include Ireland, the UK and Euroclear Bank. Clients will also benefit from a single harmonised interface (called the common communication interface)
to access all the Euroclear central securities depositories.

Just how far progressed is Euroclear in the removal of the Giovannini Group barriers and where is more focus needed?
We are not alone in addressing the 15 Giovannini Group barriers (six asked of the private sector to remove; nine of the public sector to remove). However, because Euroclear has been undertaking a major effort of platform consolidation for five European markets, including market-practice harmonisation, we have naturally been seen as a leader in meeting the Giovannini Group objectives in removing the six barriers involving the private sector.
As part of our Single Platform project:

• Barrier 1 – We are adopting ISO standards throughout the group to comply with the recommendation to eliminate national differences in
IT interfaces.
• Barrier 7 – We are designing our systems to have harmonised operating hours and settlement deadlines.
• Barrier 4 – Intra-day settlement finality between Euroclear group markets will be achieved.
• Barrier 6 – Settlement periods within the Euroclear group markets will be harmonised.
• Barrier 3 – We are implementing new harmonised rules and practices for corporation actions and other custody-related procedures within the Euroclear group markets to be in sync with the rules agreed across the EU.
• Barrier 8 – We and the rest of the EU have already begun using ISIN codes as the unique securities identifier.
We would urge greater efforts by national authorities to address the barriers that have been assigned to the public sector for resolution, for example, the legal and fiscal barriers. Euroclear is contributing to several public-policy initiatives by sharing our expertise with policymakers (e.g. the FISCO group on harmonising tax-collection procedures and settlement finality through The Hague Convention).

What is your view on Target2-Securities and will you join?
In 2006, the ECB proposed a public-sector owned and operated common settlement platform for all Eurozone markets, with an anticipated launch in 2013. Last December, it published a very thorough compendium of user requirements, on which we gave feedback in April, like other market participants. In our response, we called for further debate on fundamental questions that remain unanswered.

In particular, many market practitioners have asked for greater clarity on the totality of costs for users under T2S, on the allocation of risks and liabilities between participants, on the system’s governance structure and overall economic feasibility.
Euroclear is supportive of the objectives of T2S, i.e. of reducing costs and risks associated with cross-border settlement in Europe. For the moment, we remain neutral on the question of whether T2S can achieve these ambitious objectives, pending clarification by the ECB on these outstanding questions. It is on this basis that we will be able to decide whether to join and on which conditions.

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