Have Europe’s financial markets start to sing from the same sheet? Tomas Kindler, Head of Clearing, at SIX Securities Services argues that despite some cost issues in Europe still waiting to be addressed, they have.
15 years ago, with the launch of the Euro, the European Union achieved a major milestone in the development of its ambitious single European Financial Market project. The introduction of the single European currency was a significant step towards the creation of a competitive financial market, and has since been followed by numerous other harmonisation projects. The Single European Payments Area (SEPA), for example, sought to improve the efficiency of cross-border payments and turned the fragmented national markets for euro payments into a single domestic one. On the capital markets, the Markets in Financial Instruments Directive (MiFID) aimed to increase competition through a variety of measures, including a push for more flexibility in clearing, and the harmonisation of settlement. However, despite these measures, the European capital markets have tended to remain fragmented and divided, with multiple national venues continuing to compete with each other, from Paris to Warsaw, and Frankfurt to Madrid, creating a complex and disjointed experience for institutions and investors.
Overall, the fragmentation of the European capital markets is creating radical inefficiencies and hindering the development of a truly world-class market capable of taking on the US markets’ position of hegemony. In comparison with the US market, where trade intracontinent is both cheap and efficient, cross-border trade within the EU remains expensive and complex. The plethora of national post-trade structures, each with country specific stipulations and rules means that there is an over capacity at every layer of the value chain, and redundancies are proliferating across the European financial system. It is market participants who bear the financial brunt of these issues, with many post-trade service providers passing on the costs of fragmented and inefficient infrastructure to their customers. Too many trading venues, too many central counterparties (CCPs) and too many central securities depositories (CSDs) have added up to disparate IT systems and procedures, leaving Europe at a disadvantage in comparison with its competitors.
In a welcome move, we are now witnessing a new effort to bring harmony to Europe’s capital markets, as supranational bodies grasp the thorny topic of orchestrating market reform. This follows the outbreak of the global financial crisis in 2008, which revealed the extent to which common frameworks and standards were essential for the stabilization of the financial markets. For example, in 2012, the implementation of EMIR (European Markets Infrastructure Reform) heralded a raft of new standards, including central clearing for some classes of OTC derivatives, standardisation of reporting procedures, and new operational and risk requirements for CCPs. Following on from this will be the implementation of the TARGET2-Securities (T2S) initiative, which will standardise settlement for cross-border bonds and equities trading across Europe. Following a number of delays, the go-live date has been set for June 2015. This project will create a centralised settlement platform for twenty markets encompassing 23 CSDs, with all settlement to take place in Euros.
As reforms take effect and common standards and frameworks are accepted by market players, a leaner and more efficient European financial market is starting to see the light. As part of this process, the post-trade sector is undergoing its own rebalancing period as it adapts to a new and more competitive playing field. As it stands, on the clearing side, there still remains a glut of CCPs, which can make it difficult for market players to reduce their risk, as they have to partner with a multitude of clearing providers. However, we are now seeing the first wave of active consolidation in the space, as demonstrated by the recent merger between EMCF (European Multilateral Clearing Facility) and EuroCCP, as well as SIX x-clear’s purchase of Oslo Clearing. At the same time, increased competition between CSDs is leading them to focus on providing additional services to their client base. With regulations such as Basel III and EMIR driving demand for eligible collateral, collateral optimisation has become increasingly important for both the sellside and their buyside clients. Productive collateral management has become more than just simply aggregating and netting multiple streams of collateral from a variety of silos, as firms seek comprehensive solutions that can enable them to source the best collateral and mitigate risk, while coping with an array of requests, such as the need to respond to frequent mark-to-markets. As such, post-trade operators that have the scale and the experience to provide these services are seeing increasing demand.
Consolidation of market infrastructure in Europe will surely continue, as investment firms find themselves free to “shop around”, choosing post-trade service providers that meet their needs in terms of cost-effectiveness or value-added services. However, some of the real cost issues in Europe are still waiting to be addressed. These include a lack of harmonisation on tax, lack of harmonisation on corporate actions processing, and lack of data quality. However, consolidation amongst post-trade providers is a strong advance in the ambitious goal of building a competitive European financial market, as it increases efficiencies and lowers costs to the investment community.
© BestExecution 2014