Securities market infrastructure innovation: the next frontier
“Building pacifically a single, integrated, efficient and sound organisation always takes time, because we are working on the basis of the sum of individualities which all have something to bring and/or to defend.”
By Eric de Nexon, Head of Strategy for Market Infrastructures, SGSS & Pierre Colladon, Senior Advisor in Strategy for Market Infrastructures, SGSS
While securities industry infrastructures and other participants have worked hard to address the risks that arose from the financial crisis and to achieve integration of the European financial market, we still do not have a finalized global regulatory framework in place to underpin this work. More needs to be done to complete this framework and ensure all of the elements are in place. Once this legal framework is fully in place, industry participants can then make strategic decisions about how to connect to market infrastructures and also review the content and nature of their offerings for customers.
Transforming the securities market in Europe is an evolution, rather than a revolution. The transformation began 15 years ago with the introduction of the euro and since that time there have been a lot of talk and more or less successful initiatives about the integration of markets and of post-trade market infrastructures.
There have been two main periods during this transformation: pre- and post-crisis. By early 2000, public and private actors in the industry decided to address the issue of fragmentation in Europe’s securities markets. This fragmentation was identified as a source of inefficiency, risk and costs at all levels throughout the value chain. The Giovannini Group identified barriers to harmonisation on the operational, technical, legal and fiscal fronts. Work began to remove these barriers, initially aimed at completion by the end of 2006.
During the first transformation period, regulators handed over most of the responsibility for reform to private actors in the post-trade industry, who worked hard to define and implement technical and operational standards, and led concentration initiatives of market infrastructures. But there was limited progress. The ECB stepped in with Target2-Securities, which introduced major operational improvements in settlement. It would act as a catalyst for harmonisation in the post-trade environment.
The 2008 financial crisis has left its marks and the regulatory pendulum has swung back, with public authorities regulating in all domains and directions, including post-trade. However, after seven years of regulatory work the post-trade environment is still not ‘fixed’, due to a number of reasons. First of all, prudential aspects have been prioritized against integration and efficiency aspects. Moreover, important regulations that should influence the integration of market infrastructures, such as EMIR and the CSDR, face delays in the implementation of level two measures. While the overall framework has been defined for a large part of the constituencies of the post-trade area, details remain uncertain.
Despite the long-term efforts to integrate Europe’s capital markets, they are as fragmented as ever, if not more so: there are more CSDs and CCPs operating in Europe today than before 2000. Not enough progress has been made on post-trade integration, the process remains slow, perhaps too slow, and cannot be considered as smooth and steady.
Only two out of the ten technical and operational Giovannini barriers have been removed. The others should be removed totally or partially in the coming years as the CSDR comes into force, T2S becomes operational and corporate actions standards are deployed. However, five legal and fiscal barriers remain in place and there is still uncertainty about how they will be removed.
The industry is not yet at a stage whereby a process to trigger further harmonisation and better integration can occur. The industry is still working on many aspects of integration, such as corporate actions, the identification of shareholders and the content of standards for general meetings, while waiting for public authorities to at last remove legal and fiscal discrepancies.
In the wake of the financial crisis, the priorities for the industry have been risk reduction and prudential issues. The integration of market infrastructures was not a priority during the previous years, despite growing recognition that strong, integrated and efficient post-trade market infrastructures could help to secure the processes and increase confidence among investors, thus fostering growth. In improving the technical aspects of post-trade, we have to recognise that market actors face resource constraints due to the global economic environment in general and the pressure on their sources of income, in particularas interest rates remain very low.
“The industry has made progress in removing the simplest obstacles to market harmonisation and infrastructure integration, but the more we make progress in these areas, the more difficult barriers remain for us to face.” Pierre Colladon