Response from UBS to DG Competition Issues Paper of 24 May 2006 on Competition in EU securities trading and post-trading

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Gerald Watts
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1 UBS AG London Branch 3 Finsbury Avenue London, EC2M 2PA Legal & Compliance Regulatory Inquiries Group Commission of the European Communities DG Competition Carroll Barry-Walsh Tel Fax carroll.barry-walsh@ubs.com 29 June 2006 Response from UBS to DG Competition Issues Paper of 24 May 2006 on Competition in EU securities trading and post-trading We are pleased to attach our response to the Commission s above Issues Paper. Should you have any queries, please contact Jon Carr (jon.carr@ubs.com), Tel ) or Carroll Barry-Walsh (carroll.barry-walsh@ubs.com, Tel ). Yours sincerely Carroll Barry-Walsh Legal Counsel & Executive Director Head of Regulatory Inquiries Group Jon Carr Executive Director Public Policy, Manager for European Affairs UBS AG is registered as a branch in England & Wales Branch No. BR (A public company limited by shares, incorporated in Switzerland whose registered offices are at Aeschenvorstadt 1, CH-4051, Basel and Bahnhofstrasse 45, CH-8001 Zurich). Registered Address: 1 Finsbury Avenue, London EC2M 2PP. A member of the London Stock Exchange.

2 Page 2 of 9 EUROPEAN COMMISSION ISSUES PAPER OF 24 MAY 2006 ON COMPETITION IN EU SECURITIES TRADING AND POST-TRADING : COMMENTS FROM UBS 1 This note sets out our comments on the above paper and comprises two parts: the first sets out our general comments on the subject, including a summary (see Annex) of recent progress in EU posttrade clearing and settlement arrangements; while the second comments on the specific issues summarised in the table on pages 25 and 26 of the report published by DG Competition on 24 May. 2 We would be happy to provide more information on our response or related issues. Part 1: General comments 3 Fundamentally, we believe that market forces, assisted by existing and not new - regulation, provide the most effective means of achieving our shared objective of a lower cost, lower risk and more efficient post-trade environment for securities trades. Reflecting this, we strongly support the finding of the Commission that competition has a fundamental role to play in the post-trade environment and the view on page 2 of the 24 May DG Competition report that CCP services could - and probably should - operate in a competitive environment provided issues of interoperability are overcome. Key themes consistent with the 24 May DG Competition report: Platform neutral, pro-competition UBS prefers market solutions with market need, to prescriptive regulation Key public statements by regulators, including DG MARKT comments in speeches, DG Competition s 2005 survey and its report of 24 May, have contributed positively by stimulating market solutions without prescriptive regulation Examples of competitive clearing shaping the future landscape include the existing choice of x- clear or LCH.Clearnet for Swiss and European Blue Chip flow via virt-x; the announced extension to Swiss mid-cap flow via SWX, and the 24 May announcement by the London Stock Exchange (LSE) and x-clear to extend choice for UK flow. Examples of 2006 competitive pan-european trading initiatives include Instinet s announcement of Chi-X and Borsa Italiana s plan to launch Euro area Blue Chips tradable on its MTA platform EU law, notably competition law and MiFID, can be called to address access questions where an incumbent frustrates a new entrant The overarching objective is to achieve efficient, safe clearing and settlement, in a competitive environment that reduces frictional costs, to provide the highest standards of service for our clients The case for market forces delivering marginal pricing in a timely manner includes competition via x-clear: it works for Cash Equities and is commercially attractive UBS welcomes the offers from clearing service providers whatever their provenance. Thus UBS supported LCH as a choice to x-clear when virt-x introduced clearing, and then migrated Swiss Blue-Chip flow originating via its London virt-x membership from LCH to x-clear after objective comparison of the competitive offerings UBS encourages approaches of offerings that are commercially and functionally attractive 4 We would emphasise that: - The industry is at a pivotal moment, stimulated by public comments by DG MARKT and reports by DG Competition, at which we are seeing an increase in market-led competition, including at CCP level (following the LSE /x-clear announcement on 24 May) and at

3 Page 3 of 9 exchange level (cf recently mooted mergers; and Borsa Italiana s plan to launch Euro area Blue Chips tradable on its MTA platform) which could have a significant impact on the posttrade environment. - To support the emergence of post-trade competition, speedy responses to any market abuses - via the application of existing legislation (notably EU competition law and MiFID (eg Article 34)) to prevent incumbent firms frustrating access to their markets - will be necessary. We do not consider that new EU legislation is required. Indeed, the preparation of a measure seeking to address current competition concerns could actually set back progress, since in the time it would take to agree it, commercial opportunities could be lost. - The private sector has made considerable progress towards the harmonisation and standardisation of market practices, by focusing on the removal of the six Giovannini barriers within its remit (see Annex below). Such progress has facilitated competition.

4 Page 4 of 9 Part 2: Specific comments on the table in paragraph 103, pages 25-6 of Issues Paper Concern Possible Reactions UBS Response Restrictive clauses in agreements between exchanges and CCP s relating to freedom of the latter to provide services to competitors. - Restrictive clauses to be removed. - Measures to avoid risk of owners of closed systems free riding open ones. - Market participants to draw DG Comp s attention to failures to provide access. The choice of post-trade environment should belong to the user not the exchange. Where there is a market need for a competitive offering, existing and impending MiFID legislation can be called to address access questions where an incumbent frustrates a new entrant In practice, we are already seeing an increase in marketled competition, both at exchange (cf recently mooted mergers, and examples of 2006 competitive pan- European trading initiatives including Instinet s announcement of Chi-X and Borsa Italiana s plan to launch Euro area Blue Chips tradable on its MTA platform) and at CCP (24 May LSE announcement supporting x- clear as a competing CCP in the UK market) levels. Idem between CCPs and providers of agency settlement services. - Idem. As above. Opacity of arrangements/ agreements in industry - What are the information requirements to allow greater competition and propose solutions (codes of conduct, reg restraints) Conditions necessary for greater competition are: - Access to trade feed, infrastructure, central bank money etc. - Interoperability - No impediments to competition from local regulators - Equal status of competitors in the market where they act. We believe that access/ interoperability should be made available once a commercial opportunity has arisen (as in the case of x-

5 Page 5 of 9 Lack of transparency in infrastructure pricing Lack of accounting unbundling within vertically integrated service providers leading to difficulty in detecting abusive cross-subsidies The same issue in nonvertically integrated structures, as it concerns information services and trade reporting fees. - Service providers might agree guidelines with users on price transparency. - User groups or other bodies might propose to publish regular comprehensive surveys of fees for investors - Possible regulatory solution. - Market or regulatory solution. - Market or regulatory solution. clear in the UK), rather than a default requirement for each market since this would provide connectivity without any commercial justification and thus increase costs. Market-led principles exist e.g. LIBA s Guiding Principles for Tariffs as outlined on page 4 of its 3/4 Feb 2005 press release posted on the website. We do not think that there is a lack of transparency in infrastructure pricing, since all tariff information is in the public domain and available for scrutiny. Additionally increased transparency in pricing is only required in a monopoly environment. Where free competition exists, users have the opportunity to compare costs freely and to switch providers. We believe that market forces should be allowed to prevail, whether there is a vertical structure or not. We do not have an issue with corporate ownership of a vertical service, provided such a structure does not impede competition. Competitive offerings should be allowed on a non discriminatory basis to vertically, and non-vertically integrated service providers at each stage of the posttrade process. Those who make them should enjoy the same access rights, status and modus operandi as incumbent providers do.

6 Page 6 of 9 Elimination of concentration rules and other measures with equivalent effect. State measures prescribing specific platforms in order to qualify for primary dealer status in government bonds. Possible market failure in provision of technology interfaces allowing integrated trading on competing market platforms. - The measures in question, certainly where they are private in origin, should be eliminated without awaiting the entry into force of MiFID. - Market participants may wish to draw DG Comp s attention to other instances of similar rules and to failure to remove them going forward. - Elimination of these measures. - Views on this are sought, including on how such a market failure might be addressed in addition to the measures foreseen under MiFID. Hence we support a marketled solution, backed up by support from DG Competition where necessary, rather than a regulatory solution. We believe that MiFID will address this issue. We support the elimination of these measures. The markets are increasingly moving towards standardisation of technical interfaces and messaging, as demonstrated by the unanimous industry agreement to commit to ISO standards and 20022, in order to remove Giovannini barrier 1. We believe this is progressing well and no further action is necessary. Lack of CCP and CSD interoperability undermining access. - Market or regulatory action We would reiterate that interoperability should exist only where a commercial opportunity has been identified/proposed as in the case of x-clear in the UK market or SIS (Swiss CSD) in the German market. Full interoperability (i.e. ability to access any CCP in each market) should not be a requirement for each market. We wish to see greater competition, whilst

7 Page 7 of 9 minimising IT spend and possible operational risk associated with multiple unnecessary interfaces. Lack of transparency in bundling of execution and other services by brokers. - Under MiFID, the commission is of the view that such practices should be appropriately reformed. Regulatory action may be necessary where foreign participants do not have a access to central bank money. We consider that MiFID increases transparency (eg via its best execution provisions) and that the priority now should be on its implementation. The FSA in the UK has put forward rules relating to the unbundling of services. UBS is at the forefront of the unbundling dialogue with clients and would be pleased to share its approach with the Commission if requested. We would add that the there is considerable competition amongst brokers providing services for their clients making any action other than those stated unnecessary.

8 Page 8 of 9 ANNEX: RECENT PROGRESS IN EU CLEARING AND SETTLEMENT ARRANGEMENTS Encouragement of competitive alternatives, including LSE Announcement re x-clear UK the first major market to offer its customers a choice of post-trade clearing venue. On 24 May LSE announced it had agreed terms with x-clear to provide a CCP service alongside that of LCH.Clearnet. x-clear also provides competing clearing services to LCH.Clearnet in the Swiss virt-x and SWX markets. Instinet announced its plan to launch pan European trading competition on Chi-X Following publication of the 24 May DG Competition Report, Borsa Italiana now plans a competitive launch of Euro area Blue Chips tradable on its MTA platform. SWIFT organisation Giovannini Barrier 1 National differences in the information technology and interfaces used by C&S providers should be eliminated via an EU-wide protocol. The October 2005 Draft Protocol Recommendation for an EU-wide protocol based on extensive industry consultation (spring 2005) received wide industry support. Two step approach: within 2 years, realisation by the infrastructure (CSD, CCP) and within 5 years by the financial industry (end-to-end). ECSDA (European CSD Association)/ ESF (European Securities Forum)/ EALIC (European Association for Listed Companies) and EBF (European Banking Federation) - developed standards ECSDA Giovannini Barrier 3 National rules relating to Corporate Actions should be harmonised Many standards for Corporate Actions harmonisation are defined/ agreed, and implementation is being planned. Complex voluntary Corporate Actions harmonisation is still in discussion. Detailed industry feedback to Shareholder Rights Directive Proposal (part of corporate law and corporate governance) Shareholder information and exercise of voting rights at "Annual General Meetings" are part of Corporate Actions. Giovannini Barrier 4 - Intra-day settlement finality needs to be guaranteed cross-border to minimise systemic risk and improve efficiency and reduce cost Settlement finality is defined (min. 1 settlement cycle every hour). Solutions are already in place in some countries and implementation in others is progressing well. Giovannini Barrier 7 - Operating hours and settlement deadlines should be harmonised using TARGET hours as the benchmark.

9 Page 9 of 9 Deadlines are agreed and implementation is progressing well. Euroclear harmonisation Euroclear, with the co-operation of the private sector, is working on several harmonisation issues in order to progress development of common settlement platform to support UK & Euronext markets (France, Portugal, Netherlands and Belgium) Extensive consultations with relevant markets and authorities to harmonise processes before moving on the single platform (e.g. communication interfaces in a fully SWIFT standardized format, Corporate Actions harmonisation, Euro D-v-P settlement in central bank money, sec. financing and settlement windows harmonisation) European Securities Forum (ESF) Working with private sector user groups to define pre-settlement data matching standards (part of Giovannini Barrier 6) Standards are under final review by the industry. Developed proposal for dematerialisation of securities in the UK Proposal finalised and submitted to the UK authorities LCH.Clearnet Harmonisation The private sector is working closely with LCH.Clearnet on harmonising the netting and risk management practices for equities that currently differ between the UK and Euronext markets. Target implementation of this 'EquityClear' project is Document2

ABN AMRO response to DG Competition Issues Paper on Competition in EU Securities Trading and Post-Trading

ABN AMRO response to DG Competition Issues Paper on Competition in EU Securities Trading and Post-Trading European Union Affairs & Market Infrastructures, Securities ABN AMRO EU Liaison Office Rue de la Chancellerie 17 A B 1000 Brussels Contact: Anne Pouchous Telephone: +.32.2.546.03.65 E-mail: anne.pouchous@be.abnamro.com