CMU to include clearing and settlement review

4 min read
Helen Bartholomew

Proposals for the European Commission’s Capital Markets Union regulation look set to be broader in scope than some had anticipated, with a renewed focus on post-trade infrastructure to include a review of clearing and settlement processes across the 28 member states.

According to leaked documents prepared by the EC and seen by IFR, a draft action plan includes a range of measures aimed at removing cross-border barriers to facilitate the free flow of capital across the European Union.

As well as tackling uncertainty around securities ownership, the commission will also “pursue improvements in the arrangements for clearing and settlement of cross-border securities transactions”, the documents show.

Some of the proposals are expected to be announced tomorrow when Jonathan Hill, EC commissioner for financial services and capital markets union, speaks to the European Fund and Asset Management Association tomorrow.

While CMU has always been a wide-reaching piece of legislation, the focus on clearing and settlement issues seems to be a recent addition. A more harmonised approach to clearing and settlement is crucial in encouraging cross-border retail flows, which have to date remained largely domestic due to the high cost associated with cross-border execution.

“Post-trade infrastructures are now an issue in CMU, which previously didn’t seem to be the case,” said one industry participant close to the regulatory debate. “You need to remove all the barriers to cross-border clearing and settlement if you want to stimulate the retail market as it’s still much more costly for retail to trade across borders.”

Retail participation across borders could be crucial if the EC is to succeed in its plan to create an EU-wide version of Germany’s private placement market that provides equity and debt funding for small-cap businesses.

While EU stock exchanges embarked on consolidation in the wake of the single currency through the development of Euronext, trading infrastructure remains fragmented. The establishment of a single settlement platform, Target2-Securities, has gone some way to addressing the local nature of settlement services.

The platform is in the process of being rolled out, but with 24 central securities depositories signed up to the platform, some believe there is further scope for consolidation

In its action plan, the EC notes that a significant restructuring of the post-trade infrastructure is already underway ahead of new regulations driving changes under the European Markets Infrastructure Regulation, Central Securities Depositories Regulation and Mifid II, but many are yet to take shape – regulatory technical standards for CSDR are now anticipated in November.

“Markets need to be monitored to ensure that legislation keeps pace with these changing practices while simultaneously ensuring that the safety and efficiency of the post-trading system is not diminished,” the report says.

The ambitious regulation is intended to boost Europe’s competitiveness through a stronger single market, whose scale could be on a par with the US.

The report notes that the economy of the 28 member states is roughly equivalent to that of the US, but equity markets are less than half the size, while the bond markets are less than a third of the size.

“More integrated capital markets will lead to efficiency gains and support Europe’s ability to fund growth,” the EC notes.

Market participants are urging the EC to move forward with its CMU proposals due to the ambitious nature of the regulation and the relatively short time to implementation. Implementation is slated for 2019 and the commission will review achievements and reassess priorities in 2017.

“It’s quite ambitious to be looking at a complete overhaul of post-trade infrastructure by 2019. Target2-Securities took nine years from initial proposals to going live, and this is a much more ambitious change,” said the regulatory expert.

European Commission President Jean-Claude Juncker REUTERS/Yves Herman