Overview of EU25 securities trading, clearing, central counterparties, and securities settlement. European Commission Competition DG

Transcription

1 Overview of EU25 securities trading, clearing, central counterparties, and securities settlement European Commission Competition DG Final Report by London Economics February 2004

2 Overview of EU25 securities trading, clearing, central counterparties, and securities settlement an overview of current arrangements European Commission Competition DG Final report by Disclaimer: The views expressed in this report are those of the authors and do not necessarily reflect those of the Commission. February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

3 Executive summary xii 1 Introduction 1 PART I THE SECTOR 2 2 Background Key steps in clearing and settlement process Clearing Settlement Categories of organisations involved in C&S Clearing organisations Settlement organisations 4 3 Key trends in trading and post-trading infrastructures Factors driving consolidation process Two models of integration -- horizontal and vertical The consolidation is far from complete 9 4 Major trading platforms Equity market London Stock Exchange (LSE) Euronext Deutsche Börse OMHEX Fixed-income market Government bonds Corporate bonds 17 February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

4 5 Major European clearing institutions LCH.Clearnet Corporate structure Products and markets Regulatory approval Eurex Clearing Corporate structure Products and markets 21 6 Major European settlement institutions National CSDs International CSDs (ICSDs) Clearstream Banking Luxembourg Euroclear Bank 25 PART II National Infrastructures 33 7 Overview 33 8 Austria Exchange Clearing and settlement CSD Access Exclusive arrangements 36 9 Belgium Trading Exchanges: corporate structure/products Access Clearing 39 February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

5 9.2.1 Corporate structure Products and markets Role as central counterparty Access Settlement Corporate structure Products and markets Proposed restructuring of Euroclear Access Exclusive arrangements Denmark Major market institutions Exchanges Central counterparties Clearing and settlement institutions Ownership Access Exclusive arrangements Finland Trading Clearing and settlement Exclusive arrangements France Trading Exchanges: corporate structure/products and markets Access Clearing Products and markets 55 February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

6 Role as a central counterparty Access Settlement Proposed restructuring of Euroclear Products and markets Access Exclusive arrangements Germany Trading Exchanges Access Clearing Eurex Clearing AG Clearstream Banking AG Settlement Clearstream Banking AG Exclusive arrangements Greece Market institutions Exchange Clearing and settlement Ownership Legislation and supervision Exclusive arrangements Ireland Exchanges Central counterparties and clearing institutions Settlement institutions 77 February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

7 15.4 Regulation Luxembourg Markets Clearing and settlement rules Italy Main market institutions Exchanges Clearing and central counterparties Settlement Exclusive arrangements Netherlands Trading Exchanges: corporate structure/products and markets Access Clearing Products and markets Role as a central counterparty Access Settlement Corporate structure Proposed restructuring of Euroclear Products and markets Access Exclusive arrangements Portugal Trading Exchanges: corporate structure/products and markets 96 February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

8 Access Clearing Corporate structure Central counterparty Access Settlement Corporate structure Products and services Access Exclusive arrangements Spain Exchanges Corporate structure/products and services Access Clearing and settlement Exclusive arrangements Sweden Exchanges Central counterparties Clearing and settlement institutions Access Exclusive arrangements UK Trading Exchanges Access Clearing Corporate structure 115 February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

9 Products and markets Role as central counterparty Access Settlement Corporate structure Proposed restructuring of Euroclear Products and markets Access Exclusive arrangements Cyprus Institutional framework Markets Exclusive arrangements Czech Republic Exchanges Central counterparties and clearing institutions Settlement institutions Regulation Ownership Access Exclusive arrangements Estonia Exchanges Central counterparties and clearing institutions Settlement institutions Regulation Ownership Access 129 February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

10 25.7 Exclusive arrangements Hungary Exchanges Central counterparties and clearing institutions Settlement institutions Regulation Ownership Access Exclusive arrangements Latvia Exchanges Central counterparties and clearing institutions Settlement Institutions Regulation Ownership Access Exclusive arrangements Lithuania Exchanges Central counterparties and clearing institutions Settlement Institutions Regulation Ownership Access Exclusive arrangements Malta Exchanges 144 February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

11 29.2 Clearing and settlement Central counterparties and clearing institutions Settlement institutions Regulation Ownership Poland Exchanges Central counterparties and clearing institutions Settlement institutions Regulation Ownership Access Exclusive arrangements Slovakia Exchanges Clearing and settlement institutions Exclusive arrangements Slovenia Exchanges Clearing and settlement institutions Regulation Ownership Access 153 Annex 1 Questionnaire 155 February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

12 Tables & Figures Page Figure 1: MTS Landscape 17 Figure 2: Eurex Clearing Structure 21 Figure 3: Euroclear Group 27 Figure 4: Euronext and EuroClear 30 Figure 5: Clearstream and Eurex 32 Figure 6: Austria securities systems 35 Figure 7: Structure of the Euronext Group 38 Figure 8: Belgium securities systems 41 Figure 9: Denmark securities systems 48 Figure 10: Finland securities system 51 Figure 11: Structure of Euronext Group 53 Figure 12: Eurex Clearing AG Market Participants 66 Figure 13: Clearstream Corporate Structure 70 Figure 14: Deutsche Börse Group holdings 71 Figure 15: Germany securities systems 72 Figure 16: Hellenic Exchanges group structure 74 Figure 17: Greece securities systems 75 Figure 18: Ireland securities systems 79 Figure 19: Luxembourg securities systems 81 Figure 20: Structure of Euronext Group 88 Figure 21: Netherlands securities systems 90 Figure 22: Portugal securities systems 100 Figure 23: Spain securities systems 104 Figure 24: Sweden securities systems 108 Figure 25: United Kingdom securities systems 121 Figure 26: Cyprus securities systems 123 Figure 27: Czech Republic securities systems 127 Figure 28: Estonia securities systems 130 Figure 29: Hungary securities systems 134 February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing.

13 Tables & Figures Page Figure 30: Securities settlement systems in Latvia 137 Figure 31: Latvia securities systems 140 Figure 32: Lithuania securities systems 143 Figure 33: Malta securities systems 145 Figure 34: Poland securities systems 149 Figure 35: Slovakia securities systems 151 Figure 36: Slovenia clearing and settlement process 154 Figure 37: Slovenia securities systems 154 Table 1: Source of exclusive arrangement - equity Table 2: Source of exclusive arrangement government securities Table 3: Summary of New member States' securities systems February 2004 Copyright. No part of this document may be used or reproduced without express permission in writing. xvi xvii xviii Table 4: Key Steps in clearing and settlement process 2 Table 5: European stock exchanges, equity, October Table 6: Eurex Clearing, clearing licenses 21 Table 7: Member States CSDs 23 Table 8: Overview of Euronext Markets 37 Table 9: Overview of exclusive arrangement in clearing and settlement 45 Table 10: Overview of Euronext Markets 52 Table 11: Overview of exclusive arrangement in clearing and settlement 60 Table 12: Overview of German equities markets 61 Table 13: Eurex Clearing AG Clearing Activities 65 Table 14: Overview of clearing and settlement arrangements 71 Table 15: Overview of exclusive arrangement in clearing and settlement 95 Table 16: Recognised Investment Exchanges (1) 112 Table 17: Additional information on clearing and settlement arrangement 119

14 Executive summary Executive summary! This report provides an overview of the securities trade, clearing and settlement arrangements in the 15 Member States and the 10 New Member States of the EU.! Our research is based, in part, on the responses to the questions regarding access and exclusive arrangements raised in the Commission s questionnaire that had been sent to the competition authorities of the Member States.! Some information contained in these replies has meanwhile been superseded by recent developments in these fast-changing markets. In these cases, or at least in the ones that we have been able to identify, we have replaced these replies, as appropriate, to reflect new information.! This report also includes additional information gathered from a wide range of sources: national legislation, stock exchanges trading rules, clearing houses and settlement organisations admission rules, studies by international organisations including the BIS, the ECB and the IOSCO, national securities regulatory authorities as well as articles by financial industry specialists, academics and specialised newspapers.! The information available shows that the business models adopted by exchange operators and securities clearing and settlement organisations vary greatly across Europe.! Moreover, consolidation of trading and post-trading infrastructures has proceeded at an unprecedented pace over the past few years in Europe. Several mergers or alliances between securities markets infrastructures have occurred. This consolidation has been both vertical and horizontal in nature. While consolidation happened, to a large extent, at the national level, a number of significant mergers and alliances also took place at a pan-european level.! For example, the Euronext group has become a vertical silo through three phases of horizontal consolidation. The first phase involved the consolidation of trading across four national markets. The second phase involves the consolidation of national clearinghouses from five different Member States into a single clearinghouse (LCH.Clearnet). Finally, the last phase involves the consolidation of settlement services in partnership with Euroclear.! Another example of recent structural change is provided by the Deutsche Börse. Its model is one of vertical integration whereby a single organisation has an ownership stake in trading, clearing and settlement. Indeed, through its various organisations, Deutche Börse now covers the February 2003 xiv

15 Executive summary entire process chain from order input to custody of shares.! With the exception of Luxembourg, all Member States markets have exclusive arrangements for post-trade processing of equity transactions, and the organisation providing clearing services is typically, but not always, different from the one providing settlement services. Under these exclusive arrangements, market participants have no choice but to use the clearing and settlement organisation prescribed by the stock exchange. In nearly all Member States, exclusivity in clearing and settlement does not arise from national legislation or regulation, but from stock market and clearing organisations access rules.! In most instances, the specific choice of the prescribed clearing and settlement institution arises from the ownership of these institutions by the stock exchange (for example, Germany, Spain) while in a few other instances the choice flows from a contractual arrangement between the stock exchange and an independent clearing or settlement institution (for example, UK) and, as such, is subject to potential change over time.! The picture is somewhat different with respect to clearing and settlement of government debt transactions. Indeed, we found exclusive arrangements in six Member States with the remaining nine markets open to competition from alternative providers of clearing and settlement services.! There are exclusive arrangements with respect to the clearing and settlement of securities transactions in every single New Member State. Most of these are de facto exclusive arrangements. However, in Cyprus, Latvia and Malta, the origin of the exclusivity can be found in national legislation.! Although exclusive arrangements are predominant, this might not necessarily always be the case. For example, the Luxembourg stock exchange allows users to use the clearing organisation of their choice. More recently, in February 2004, the Deutsche Börse changed its rules to allow competition in clearing and settlement.! Competition is also slowly developing in the trading of equity in Europe. For example, the London Stock Exchange will launch a Dutch Trading Service in May Moreover, the Deutsche Börse has also expanded its European blue-chips segment that now includes all European blue-chip stocks with the exception of those from Italy and Spain. Thus, from May 2004, three exchanges, Euronext, the Deutsche Börse and the London Stock Exchange will be competing for trading volumes in the same shares. February 2003 xv

16 Executive summary Table 1: Source of exclusive arrangement - equity Law / regulation Regulation of platforms Clearing Settlement Clearing Settlement Austria No No Yes Yes Belgium No No Yes Yes Denmark No No Yes Yes Finland No No Yes Yes France No No Yes Yes Germany No No Yes Yes Greece No No Yes Yes Italy No Yes No Yes Ireland No No Yes Yes Luxembourg No No No No Netherlands No No Yes Yes Portugal No No Yes Yes Spain No No Yes Yes Sweden No No Yes Yes Yes (LSE) Yes (LSE) UK No? No (virt-x) No (virt-x) February 2003 xvi

17 Executive summary Table 2: Source of exclusive arrangement government securities Law / regulation Regulation of trading platform Clearing Settlement Clearing Settlement Austria No No No No Belgium No No Yes Yes Denmark No No Yes Yes Finland No No No No France No No Yes Yes Germany No No No No Greece No No Yes Yes Italy Yes (Gov.sec) Yes (Gov.sec) Yes (Gov.sec) Yes (Gov.sec) No (Eurobonds) No (Eurobonds) No (Eurobonds) No (Eurobonds) Ireland No No No No Luxembourg No No No No Netherlands No No No No Portugal No No No No Spain No No Yes Yes Sweden No No No No UK No No No No February 2003 xvii

18 Executive summary Table 3: Summary of New member States' securities systems Country Exchanges Clearing Houses Exclusivity Settlement Systems Exclusivity by law observed by law observed Cyprus Cyprus Stock Exchange Cyprus Stock Exchange Yes Yes Cyprus Stock Exchange Yes Yes Czech Republic Prague Stock Exchange Czech National Bank No Yes Univyc No Yes RM-S RM-S No Yes RM-S No Yes SKD SKD No Yes SKD No Yes Estonia Tallinn Stock Exchange ECSD No Yes ECSD No Yes Hungary Budapest Stock Exchange KELER No Yes KELER No Yes Latvia Riga Stock Exchange LCD (DENOS) Yes Yes LCD (DENOS) Yes Yes Gov t Securities Bank of Latvia (VNS) No Yes Bank of Latvia (VNS) No Yes Lithuania NVPB LCVPD No Yes LCVPD No Yes Malta Malta Stock Exchange Malta Stock Exchange No Yes Malta Stock Exchange No Yes Gov t Securities Central Bank of Malta Yes Yes Central Bank of Malta Yes Yes Poland Warsaw Stock Exchange KDPW No Yes KDPW No Yes Slovakia Bratislava Stock Exchange Bratislava Stock Exchange (*) No Yes Bratislava Stock Exchange (*) Yes Yes Slovenia Ljubljana Stock Exchange KDD No Yes KDD Yes Yes (*) It has been announced ( that Slovakia will, in the first quarter of 2004, have a new CSD, to operate independently from the stock exchange February 2003 xviii

19 Section 1 Introduction 1 Introduction This is the report for the study No. COMP/D1/2003/13 Provision of a study in the area of competition policy concerning financial services, in particular securities trading, central counterparties, clearing and settlement. The purpose of this research project is to provide an inventory of exclusive arrangements in securities clearing and settlement in all EU countries and New Member States. The main sources of information used in this analysis were the replies to questionnaires sent to national Competition Authorities and public information available from trading, clearing and settlement infrastructures, press articles, etc. By exclusive arrangement we mean any obligation on a user of a trading platform to use a specific clearing and settlement infrastructure. The source of the obligation may be legal or regulatory, or may lie in the rules of the trading platform. This report is divided into two parts: The first part (Sections 1-6) provides an overview of securities clearing and trading in the 25 EU Member and New Member States whilst the second part (Sections 7-32) contains the individual country overviews of national securities trading, clearing and settlement infrastructures. Section 2 provides background information on the main steps in securities clearing and settlement. Section 3 reviews key trends in trading and posttrading infrastructures. Section 4 provides an overview of major trading platforms. Section 5 describes the two major European clearing institutions and Section 6 describes the major European settlement institutions. Sections 7 to 32 provide on a country-by-country basis the detailed description of the national trading, clearing and settlement infrastructure. The questionnaire sent to the national Competition Authorities is also appended at Annex 1. February

20 Section 2 Background 2 Background PART I The Sector This chapter briefly describes the key steps that take place after a securities trade has been effected. It also provides an overview of the types of organisations involved in the clearing and settlement process in Europe. 2.1 Key steps in clearing and settlement process The process of clearing and settlement begins when a securities trade has been executed. A series of steps and actions are involved in the process of completing the transfer of ownership of the security and the corresponding payment. Only when both delivery and payment have been finalised is settlement of the securities transaction achieved. These steps are presented below in Table 4 and are reviewed in greater detail in the next sections. Table 4: Key Steps in clearing and settlement process Key Stages Pre-clearing Clearing Settlement Post-settlement Key Steps Confirmation of the terms of the securities trade Clearing of the trade by which the respective obligations of the buyer and the seller are established Netting by a central counterparty (possibly) Novation by a central counterparty (possibly) Delivery -- involves the transfer of the securities from the seller to the buyer Payment -- involves the transfer of funds from the buyer to the seller Notary function -- involves the registration of ownership of securities on a legal record Custody -- involves safekeeping of the securities Asset servicing, e.g. corporate action, tax services, exercise of voting rights Clearing The clearing of securities is the process that takes place between trading and settlement. Once the terms of the securities transaction have been confirmed, the clearing process begins and the respective obligations of the buyer and February

21 Section 2 Background seller are established. In other words, the clearing process involves the determination of exactly what each counterparty to the trade will be receiving. Clearing can be carried out on a gross or on a net basis. When clearing is carried out on a gross basis, the respective obligations of the buyer and seller are calculated individually on a trade-by-trade basis. When clearing is carried out on a net basis, the mutual obligations of the buyer and seller are offset, yielding a single obligation between the two counterparties. Over the past few years, a central counterparty (CCP) has been established in a number of markets. A central counterparty is an entity that interposes itself legally between the buyers and the sellers of securities by a process of novation. In such cases, the buyers and sellers of securities interact directly with the CCP and remain anonymous to each other. Some CCPs also offer a netting facility whereby the CCP offsets all obligations -- i.e. the amounts owed by and to participants in the market. In other words, there is a single debit/credit between the CCP and each member rather than a multiplicity of bilateral exposures between members. Central counterparty brings many benefits to market participants. It simplifies the management of counterparty risk by providing a single counterparty instead of several. Even though a CCP does not in itself eliminate credit risk in a market, it redistributes this risk and makes it easier for the firms to manage it. Moreover, it increases the liquidity in the marketplace through netting. Finally, netting by a CCP dramatically reduces the number and value of transactions that have to be settled and contributes significantly to reduce settlement costs. The instructions to transfer the securities and funds necessary to discharge the obligations must be transmitted to the settlement organisation. These instructions may be prepared by the counterparties themselves or by an exchange, clearinghouse or a specialised firm (which may perform trade matching and perhaps netting as well). Other actions may be required of participants before settlement can proceed, such as the prepositioning of securities, funds or collateral Settlement Settlement involves the delivery of the securities and the payment of funds between the buyer and the seller. In Europe, the vast majority of securities are immobilised or dematerialised and can be transferred by means of bookentries rather than the physical movement of the securities between buyer and seller. The payment of funds can be effected in the settlement system or, more usually, via a banking/payments system. Depending on the system, there are different ways of paying. Delivery versus payment (the simultaneous exchange of cash and securities) and delivery free-of-payment (delivery of securities without payment of funds) are some of the more common. February

22 Section 2 Background In settlement, it is important to make the asset commitment period as short as possible. A trade cannot be declared settled until both transfers are final and cannot be rescinded. As noted in Table 4, there are post-settlement services, such as safekeeping and servicing of financial assets on behalf of the owner. Servicing of financial assets may include services such as corporate action, tax services as well as exercise of voting rights. Furthermore, banking and securities financing may also be offered. These could include, for example, the provision of liquidity and financing to counterparties for their settlement needs, arranging securities financing services as well as the provision of collateral management services. While not, strictly speaking, settlement services, these services are often provided by settlement organisations and, often so, as part of their settlement services package. As indicated in Section 6 on major European settlement organisations, these ancillary services account for a very significant share of revenues. 2.2 Categories of organisations involved in C&S As a result of historically different starting points and their organic development, the entities involved in the clearing and settlement process vary from country to country but can be summarised as follows 1 : Clearing organisations In Europe, clearing is a service normally provided by clearinghouses. Most clearinghouses are commercial entities, which operate on a for-profit basis. A number of clearinghouses also act as a central counterparty fulfilling the two additional functions of novation and netting described above. While there is often only one clearing organisation providing the service nationally, this is not always the case. Indeed, in some countries, different segments of the capital market may be using different clearing service providers. Furthermore, in some countries, the clearing and netting function are carried out by a central securities depository or an international securities depository (these types of organisations are described in the following paragraphs) Settlement organisations There are three main types of service providers in the settlement process: central securities depositories, international central securities depositories and intermediaries. Below, we review in greater detail each of these three categories of institutions involved in the settlement process. Central Securities Depositary (CSD): CSDs are institutions which are primarily set up to immobilise securities or dematerialise them, so that the 1 February

23 Section 2 Background transfer of ownership between securities holders can be efficiently achieved by book entries in electronic accounting systems ( book-entry ) settlement instead of through exchange of physical certificates ( physical settlement). CSDs are the public notaries for securities. The entries in the names of account holders on a CSDs electronic accounting system ( securities settlement system ) have become the definitive record of title. Settlement of domestic securities, like trading and clearing, has historically been organised on a national basis, with a single CSD ( national CSD) traditionally responsible for the settlement of securities traded on the national exchange(s). The owners of a securities will not necessarily be a member of a CSD and many interact with a CSD through an intermediary that is a member (usually a financial institution, such as a bank or an investment firm). Government Treasuries and central banks may also be members. CSDs often used to operate on a utility basis but many have recently been privatised. They are distinct from banks or investment firms and, given the systemic importance of their function, are often supervised by national central banks or other prudential regulators. CSDs aim to offer investors, firms and intermediaries open access and inter-operability (i.e. communication between exchanges, clearing houses and depositories) under secure and safe conditions. International Central Securities Depositary (ICSD): ICSDs, such as Euroclear Bank and Clearstream, are commercial enterprises which have a two-fold role: i) A traditional CSD role: ICSDs were established by banks in the late 1960s to serve as CSDs for Eurobonds, stateless debt instruments which are internationally traded and which do not have a national CSD. Over time, ICSDs have expanded to handle non-eurobond securities such as government bonds. Furthermore, in recent years, ICSDs has acquired national CSDs and began to offer settlement services for equity transactions 2. It should be noted, however, that when an ICSD such as Euroclear Bank settles domestic equity transactions, it does not perform the notary function (i.e. the registration of ownership of securities on a legal record). National CSDs, such as Euroclear France, continue to perform this function. ii) An intermediary role which is very similar to that of the agent bank role described below, whereby the ICSD links up investors with national CSDs. In these instances, the ICSD acts as a custodian and the national CSDs perform the settlement (delivery and 2 Currently ICSDs hold the lion s share of the cross-border fixed-income settlement business but only a small fraction of cross-border European equity settlement business (estimated by financial commentators as less than 10 per cent). February

24 Section 2 Background payment) as well as the notary functions. Euroclear Bank, for example, offers this intermediary service to access domestic markets whether they control or not the national CSDs. In other words, Euroclear Bank clients can use the ICSD to channel French equity trades to Euroclear France for settlement and registration. Intermediaries: Intermediaries are commercial enterprises such as custodian banks and broker-dealers holding customers securities. They are direct or indirect members of a CSD, and provide intermediary services -- i.e. they provide access to settlement infrastructures for their customers. Intermediaries key functions is to service customers who either do not qualify as a member of a CSD, or who decide to outsource their settlement operations. Unlike a CSD whose key function is to provide book-entry settlement, an intermediary settles customers transactions in its own books only if both the transferor and the recipient of the securities happen to be its customer and then only if both customers positions are held in the same account at the CSD level. Intermediaries can also provide liquidity to their customers through credit facilities. Since membership of numerous CSDs and ICSDs implies substantial costs, and may be restricted, investors may choose to use intermediaries, which have direct or indirect membership to those entities. There are two types of custodians: agent banks and global custodians. Agent banks or local custodians have traditionally been the preferred intermediaries providing access to the national CSDs for foreign investors involved in cross-border trade of equities 3. However, with the acquisition of national CSDs by ICSDs and the transformation of ICSDs into regular banks, agent banks are very concerned about the growing importance of ICDSs and competition from the ICSDs in the value-added post-settlement activities such as custody. Global custodians are large financial institutions active in many markets. While they compete with ICSDs, they also tend to complement each other. For example, large custodians seek business from institutional investors and providers of private banking services and will use ICSDs to settle transactions in various markets. Global custodians do not handle significant settlement activity -- they rely instead on central depositories and agent banks to do this work for them 4. While these different types of organisations provide similar clearing and settlement services, they are regulated in different ways depending of their primary line of business (e.g. whether they are considered a core market 3 For example, it has been suggested that BNP Paribas Securities Services and Citibank control more than 80 percent of the European cross-border equities trade and, in the case of BNP Paribas Securities Services, more than 90 percent of the French market. 4 The distinction between an agent bank and a custodian bank is not always so clear-cut, as some agent banks act as global custodians. However, the opposite is not observed. February

25 Section 2 Background infrastructure or a bank). Efforts are currently underway at the European level to develop common standards aimed at increasing the safety, soundness and efficiency of securities clearing and settlement activities in Europe 5. 5 The European System of Central Bank and the Committee of European Securities Regulators have formed a joint committee to make recommendations on appropriate standards. Regulators have proposed a uniform, across-the-board, approach and recommended that systemically important providers of clearing and settlement services should be subject to the same standards. Comments on the proposed approach reflect a wide industry divide between infrastructures and banks on the way future infrastructures should be regulated. February

26 Section 3 Key trends in trading and post-trading infrastructures 3 Key trends in trading and post-trading infrastructures Consolidation of trading and post-trading infrastructures has proceeded at an unprecedented pace over the past few years. While there is general consensus that this consolidation process will continue in the near term, there is much debate about the pace as well as the ultimate structure. This chapter summarises the key drivers behind this consolidation process, reviews the two models of consolidation being currently pursued and points to areas where integration has not been achieved. 3.1 Factors driving consolidation process A number of important factors are driving the integration of European capital markets. First, the demand for investment has grown beyond national borders, reflecting changes in investment patterns due to a shift towards equity investment, pension funding requirements, and a general increase in information levels. Demand for capital began to exceed the capabilities of national markets, both in the context of large privatisations and of a general shift towards equity finance for businesses. Driven by their clients, investors and issuers alike, investment banking turned international. Second, progress in information technology made it possible to put securities business on an international scale. One after the other, European stock exchanges switched to fully electronic trading systems and closed down their trading floors. The end of the necessity to be physically present on the trading floor marked the start of remote participation in trading via electronic links, first from brokers outside the seat of the exchanges and soon thereafter from abroad. 6 Third, as part of the drive towards the Single Market, the European Commission took through the Financial Sector Action Plan a number of measures aimed at achieving an integrated market in financial services. Finally, the introduction of the euro is credited for reinforcing the previous drivers and accelerating the pace of consolidation in securities market infrastructures. 6 February

27 Section 3 Key trends in trading and post-trading infrastructures 3.2 Two models of integration -- horizontal and vertical These factors have contributed to reshape the securities market infrastructures, whether they be exchanges, clearinghouses or settlement organisations. Over the past few years, several mergers or alliances between securities markets infrastructures have occurred. This consolidation has been both vertical and horizontal in nature. While consolidation happened, to a large extent, at the national level, a number of significant mergers and alliances also took place at a pan-european level. Vertical consolidation is the process of consolidating, within a market or jurisdiction, different activities which take place at various points in the securities transaction chain, such as the integration of trading, clearing, settlement services within a single entity or group or entities. This model of consolidation has been followed by the Deutsche Börse Group in Germany and by the Borsa Italiana in Italy. Horizontal consolidation includes mergers or alliances between systems providing similar services in different markets or jurisdictions, such as the merger of two securities settlement systems. This model of consolidation has been adopted, for example, by the Euronext Group with the merger of the French, Belgian, Dutch and Portuguese stock exchanges and clearinghouses. While the jury is out on which approach to consolidation, if any, will prevail over the long run, further financial market integration will benefit market participants. Indeed, a recent study by 7 showed that EUwide gross domestic product could be as much as 1.1 per cent higher if European financial markets were fully integrated. 3.3 The consolidation is far from complete While consolidation has proceeded at a healthy pace, the pan-european securities market remains fragmented. In recent years, many national markets have consolidated, but there is still fragmentation of post-trading infrastructures. This has received considerable attention in recent years and continues to represent a major obstacle to cross-border trading of securities. Financial market participants, investors and policy makers have therefore identified rationalisation of clearing and settlement structures as a key step in delivering integrated EU capital markets. 8 7, Quantification of the Macro-economic Impact of Integration of EU Financial Markets, London, November February

28 Section 3 Key trends in trading and post-trading infrastructures In 2001, the Giovannini Group 9 identified and discussed the practical problems related to cross-border clearing and settlement in the EU. These difficulties include national differences in technical requirements, differences in market practice, and problems concerning taxation and lack of legal certainty. More recently, the Giovanni group set out a number of actions that would need to be taken to address the cross-border clearing and settlement issues The Giovannini Group, Cross-Border Clearing and Settlement Arrangements in the European Union, Brussels, November The Giovanni Group, Second Report on EU cross-border clearing and settlements arrangements, April February

29 Section 4 Major trading platforms 4 Major trading platforms As noted earlier, the securities exchange sector has changed dramatically in Europe in recent years. Many exchanges have merged or formed alliance often crossing national boundaries. The process of consolidation of trading platforms is generally expected to continue, bringing further benefits such as increased market liquidity and a reduction in market fragmentation. This trend has the potential to minimise costs and problems associated with crossborder trading in Europe. 11 Some of the largest European stock exchanges have demutualised and gone ahead with initial public offerings (e.g. London Stock Exchange, Euronext and the Deutsche Börse). The listing of stock exchanges on equity trading platforms has enhanced their access to capital, helping them to finance consolidation. Alternative trading networks operating alongside traditional marketplaces have emerged, offering advantages such as cross-border trading and lower transaction costs. However, not all of them survived the decline in activity in The following sections provide an overview of the main European trading platforms for equities and fixed-income securities. 4.1 Equity market The table below provides information on European stock exchanges equity turnover as well as the share of foreign equity in total equity turnover. The top three trading platforms (London Stock Exchange, Euronext and Deutsche Börse) accounted for about 70% of total equity turnover in October 2003 in the 15 EU Member States and 10 New Member States. Table 5: European stock exchanges, equity, October 2003 Total equity turnover - year to date ( m) Foreign equity as % of total equity (listed equity turnover) London Stock Exchange 2,643, % Euronext 1,397, % 11 McAndrews, James and Chris Stefanadis, The Consolidation of European Stock Exchanges, Federal Reserve Bank of New York, Current Issues in Economics and Finance, June 2002 Volume 8, Number 6. February

30 Section 4 Major trading platforms Table 5: European stock exchanges, equity, October 2003 Total equity turnover - year to date ( m) Foreign equity as % of total equity (listed equity turnover) Deutsche Börse 946, % Spanish Exchanges (BME) 666, % Italian Exchange 606, % Virt-X 439, % HEX* 348, % Oslo Børs 56, % Copenhagen Stock Exchange 46, % SWX Swiss Exchange 33, % Irish Stock Exchange 33, % Athens Exchange 25, % Wiener Börse 8, % Warsaw Stock Exchange 6, % Budapest Stock Exchange 6, % Prague Stock Exchange 6, % Iceland Stock Exchange 5, % Bratislava Stock Exchange % Ljubljana Stock Exchange % Cyprus Stock Exchange % Luxembourg Stock Exchange % Malta Stock Exchange % TOTAL 7,277, % * estimated Source: Federation of European Securities Exchanges, October 2003 February

31 Section 4 Major trading platforms The following sections review in greater detail four equity trading platforms, namely the London Stock Exchange, Euronext, Deutsche Börse and HEX which have pursued different consolidation strategies. Euronext has opted for pan-european horizontal consolidation. Deutsche Börse has pursued vertical consolidation. Finally, HEX has chosen horizontal consolidation at the regional level (among Nordic countries) London Stock Exchange (LSE) The LSE is, by far, Europe s largest stock exchange. And, unlike its key European competitors, the LSE has not participated in the consolidation process. While mergers and alliances have been discussed -- with Deutsche Börse in particular -- they have not materialised. This is not to say that the LSE has not gone through important changes. It demutualised in 2000 and listed its shares on its main market in Furthermore, in 2001, the LSE was the first large European stock exchange to launch a central counterparty service for trades executed on its electronic order book (SETS). The service was developed in conjunction with the London Clearing House and CrestCo, the UK settlement organisation that is now part of the Euroclear Group. The LSE is the only large European stock exchange without any ownership link with either a clearing or settlement organisation. As a result, the LSE is the only large European exchange to acquire clearing services for its members through a contractual relationship -- LCH.Clearnet currently provides clearing services for key securities trading services offered by the LSE. The LSE has an exclusivity arrangement with CRESTco for settlement of dematerialised securities Euronext In 2000, the Paris Bourse, the Amsterdam Exchange, and the Brussels Exchange formed Euronext, an integrated European stock exchange. The Lisbon and Oporto Stock Exchange joined Euronext in Although the national jurisdictions and licenses of the participating exchanges are maintained, Euronext provides a single operating umbrella for all four exchanges. Trading is centralized, and a uniform trading platform -- the Paris Bourse s NSC (electronic) trading engine -- is used, allowing a single trade price to be established. Shares are listed at a national level and companies can select their trading venue from among participating exchanges. 12 The Euronext group has become a vertical silo through three phases of horizontal consolidation. The first phase, discussed above, took place in 12 Goldberg, Linda, John Kambhu, James M. Mahoney, Lawrence Radecki, and Asani Sarkar "Securities Trading and Settlement in Europe: Issues and Outlook." Federal Reserve Bank of New York Current Issues in Economics and Finance 8, no. 4. February

32 Section 4 Major trading platforms and involved the consolidation of trading across four national markets. The second phase, which began in 2001 and is ongoing, involves the consolidation of national clearinghouses from five different countries into a single clearinghouse (LCH.Clearnet which is controlled by Euronext). Finally, the last phase, which also began in 2001 and is ongoing, involves the consolidation of settlement services in partnership with Euroclear. The consolidation of clearing and settlement activities is discussed in Sections 5 and 6 respectively. Access to trading on Euronext exchanges appears to be conditional on using clearing services provided by Euronext-controlled LCH.Clearnet. Furthermore, access to clearing services provided by LCH.Clearnet appears to be conditional on using settlement services provided by Euronext s partner Euroclear. These points are discussed in greater detail in the individual country reports Deutsche Börse Deutsche Börse provides a securities exchange platform through the Frankfurt Stock Exchange, derivatives trading on the Eurex market (the world's largest), market information with the DAX index and the STOXX index (33%-owned). It co-owns the Eurex futures market with the Swiss Exchange, and has developed the electronic trading platform Xetra, which it licenses to other exchanges, including the Vienna Exchange. 13 Deutsche Börse is a key example of vertical integration whereby a single organisation has a ownership stake in trading, clearing and settlement. Through its various organisations, Deutche Börse covers the entire process chain from order input to custody of shares. For instance 14 : " Trading -- The cash market of Deutsche Börse encompasses the Xetra platform and floor trading at FWB Frankfurter Wertpapierbörse (Frankfurt Stock Exchange). Shares, warrants and bonds are traded on the cash market. With the Xetra trading platform, Deutsche Börse operates one of the largest fully electronic cash markets in the world. " Clearing -- Clearing services for securities traded on the Deutsche Börse are provided by Eurex Clearing AG, 50 per cent of which is owned by Deutsche Börse (through Eurex Frankfurt AG). The Swiss Exchange owns the other half of Eurex Clearing. " Settlement -- With its acquisition of Clearstream in 2002, Deutsche Börse has consolidated its position as a fully-integrated provider of trading, clearing and settlement services for securities February

33 Section 4 Major trading platforms The kind of structure adopted by Deutsche Börse is said to make it easier to offer straight-through processing -- i.e. the process whereby once a transaction has entered the chain it goes through the rest of the chain without requiring further interventions. But, as discussed in the chapter on Germany, straight-through processing is also facilitated by obligations to clear and settle with designated organisations in order to be allowed to trade on the Frankfurt Stock Exchange OMHEX HEX Integrated Markets, the exchange division of OMHEX, is northern Europe's largest securities market 15 and is another example of horizontal consolidation. Unlike Euronext, however, HEX Integrated Markets has chosen so far to limit its activities to Nordic countries and is not, at the moment, pursuing a pan-european strategy. Through its exchange operations with Stockholmsbörsen, HEX Helsinki, HEX Tallinn and HEX Riga it offers investors access to 80 percent of the Nordic equity market and 75 percent of the Baltic equity market. HEX Integrated Markets also operates CSDs in Finland, Estonia and Latvia. OMHEX resulted from the merger, in September 2003, of the Swedish group OM who owned the Stockholm stock exchange and the Finnish exchange operator HEX. 4.2 Fixed-income market Government bonds There are two ways in which bonds are negotiated in the secondary market. The traditional way is through an organized exchange where trading has been fairly low. The second way is through the OTC market in which the main players are banks, most of them also participating in the primary auctions MTS Of particular interest in the OTC market is the MTS (Mercato dei Titoli de Stato) system, which gained considerable market share since its creation in 1988 by the Bank of Italy and the Italian Treasury to enhance trading in the secondary market for Italian government bonds, MTS was reformed in 1994 to improve market depth and activity, creating the basis of the current MTS trading system. The MTS system was privatised in In 1999, the EuroMTS system was launched to trade European government benchmark bonds as well as high quality non-government bonds covered by either mortgages or public state loans. 15 HEX website: February

34 Section 4 Major trading platforms In 2001, EuroMTS and MTS merged into MTS Global Market and became the largest inter-dealer market for Euro-denominated government bonds. Since the end of the 1990s, the MTS system has expanded to other Eurodenominated markets and is now successfully operational as MTS Finland, MTS Ireland, MTS Belgium, MTS Amsterdam, MTS Germany, MTS France, MTS Portugal and MTS Spain 16. Only Government bonds and bills are traded on the national MTS platforms. The participants in the MTS trading platform are mainly investment banks -- not only large institutions but smaller firms as well, particularly in Italy where there is a large number of small regional banks. Clearing and Settlement in MTS markets Although the MTS Group jointly controls markets across Europe, clearing and settlement arrangements in these markets can vary by country of origin. Most MTS markets conduct clearing and settlement with Euroclear and Clearstream. The Euroclear-Clearstream bridge links their operations, allowing clearing and settlement to be done equally with either company. Of those that do not use the Euroclear-Clearstream bridge, most use domestic clearing and settlement systems.! Trades in Eurobonds in MTS Italy are cleared and settled by Euroclear and Clearstream, as are all trades in MTS Germany. Other MTS markets that solely use Euroclear and Clearstream are MTS Austria, MTS Finland, MTS Ireland, MTS Amsterdam and MTS Portugal.! Trades made in MTS France are cleared in LCH.Clearnet, but settled in Euroclear. MTS Italy clears and settles government securities through Monte Titoli. MTS Belgium expanded its scope to include MTS Finland with the group renamed MTS Associated Markets SA, although the national markets remain. The National Bank of Belgium clears and settles trades in MTS Belgium. The Bank of Spain clears and settles trades in! MTS España, and VP securities performs the corresponding role for MTS Denmark.! EuroMTS is the reference electronic market for Eurobenchmark bonds, including benchmark securities for the individual MTS group markets. Trades in EuroMTS are cleared and settled by the same institutions that are used for the corresponding domestic trades. 16 The MTS system is also operational in Japan. February

35 Section 4 Major trading platforms Figure 1: MTS Landscape MTS MTS Italy Italy Exchange Eurobonds Govt Govt securities MTS MTSEspaña MTS MTS Denmark MTS MTS Austria MTS MTS Ireland Ireland MTS MTS Belgium MTS MTS Finland MTS MTS Amstersdam MTS MTS Portugal MTS MTS Germany MTS MTS France France Clearing LCH.Clearnet National Bank Bank of of Settlement Belgium Clearstream Euroclear Monte Bank of Titoli Italy Bank Bank of of Spain Spain VP VP Securities EuroMTS is the reference electronic market for Eurobenchmark bonds with a pool of instruments that now includes benchmark securities from Austria, Belgium, Finland, France, Germany, Gree ce, Ireland, Italy, The Netherlands, Portugal, Spain. Clearing a nd settlement takes place as per the rules of the national MTS subs idiaries Corporate bonds Institutions dominate the corporate bond market and their participation has been growing. Almost all secondary bond trading in Europe takes place over the counter or, in recent years, over various electronic platforms. While some active bonds are quoted on exchanges these are very much the exception rather than the rule. The non-electronic secondary market for corporate bonds resembles the way equities were traded several decades ago. The recent development of MTS has tended to create a central market place for a limited number of corporate bonds. Overall, however, the volume of secondary market trading of corporate bonds is small compared to trading volumes in equity and government bonds as most investors tend to hold corporate bonds to maturity. February

36 Section 5 Major European clearing institutions 5 Major European clearing institutions There are two major providers of clearing and central counterparty services in Europe: LCH.Clearnet and Eurex Clearing. LCH.Clearnet is part of the Euronext group while Eurex Clearing is part of the vertically integrated trading structure operated by the Deutsche Börse Group. In addition to these large providers, there are a number of smaller ones such as MEFFClear in Spain and SIS x-clear in Switzerland. 5.1 LCH.Clearnet Following the merger of the French, Belgian and Dutch clearing houses, Clearnet SA became, in February 2001, the sole clearing house and central counterparty for markets operated by Euronext 17. In June 2003, London Clearing House (LCH), UK s largest, member-owned clearing house, and Clearnet SA announced their intention to merge. The merger was completed on 22 nd December Corporate structure Under the agreement, LCH.Clearnet Limited (formerly London Clearing House) and LCH.Clearnet SA (formerly Clearnet SA) become subsidiaries of a new financial holding company established in the United Kingdom as LCH.Clearnet Group Limited. As a financial holding company, LCH.Clearnet Group Limited will be supervised on a consolidated basis by the French Commission Bancaire. As a Recognised Clearing House, LCH.Clearnet Limited will be supervised by the UK Financial Services Authority while LCH.Clearnet SA will be regulated as a credit institution under French law. LCH.Clearnet SA has a branch in Amsterdam and a branch in Brussels. The merging parties have indicated their intention to maintain independence through the ownership structure and by voting caps. For instance, the merger agreement provides that 45.1% of LCH.Clearnet SA will be owned by exchanges and 45.1% by members, with the balance held by Euroclear (9.8%). Euronext remains the largest shareholder with a 41.5% stake, although its voting rights are limited to 24.9%. LCH historically operated on a co-operative model and paid its surpluses as rebates to its users rather than as dividends to shareholders. However, LCH has more recently operated as a commercial entity. Clearnet SA was controlled by Euronext and has operated on a for-profit basis. LCH.Clearnet 17 In November 2003, Clearnet SA also became the sole clearer for the Lisbon cash market which joined Euronext in February

37 Section 5 Major European clearing institutions will also operate on a for-profit basis 18. In addition to providing ownership and governance rights for users and trading platforms, LCH.Clearnet has undertaken to operate under principles of non-discrimination across its customer base. In doing so, LCH.Clearnet hoped to retain as customers trading platforms that are competitors to Euronext 19. Although the two operating companies -- LCH.Clearnet Limited and LCH.Clearnet SA -- will remain separate for legal and regulatory purposes, they will be managed as a single entity wherever practical and beneficial according to the margining parties. Once the integration process is completed, users would be free to hold all their positions and clear either through LCH.Clearnet Limited or LCH.Clearnet SA Products and markets LCH.Clearnet will provide a broad range of products. Cash Equities LCH.Clearnet will continue to provide clearing and CCP services to all of the cash equities markets currently served by LCH and Clearnet SA " Euronext: Clearnet SA is the sole provider for clearing and CCP services for the markets operated by Euronext (Amsterdam. Brussels, Lisbon and Paris exchanges). " London Stock Exchange: LCH provides a clearing and CCP service to the electronic SETS order book operated by the London Stock Exchange. " virt-x: LCH provides clearing and CCP services on this pan-european exchange owned by SWX. Fixed Income LCH.Clearnet will continue to provide clearing and CCP services to the bond markets currently served by LCH and Clearnet SA. These are: 18 While LCH.Clearnet claims that there will be a range of benefits arising from the merger, it is too early to see whether they will materialise. The benefits envisaged by LCH.Clearnet include: economies of scale leading to reduce clearing fees charged to users over time; lower back offices costs; more efficient use of capital; facilitation of initial margin offsets; faster development of new products and services; and responsiveness to users. 19 The London Stock Exchange, in particular, was concerned that LCH.Cllearnet would treat Euronext, one of its key competitor, more favourably. 20 LCH.Clearnet intends to proceed with the integration in 3 distinct phases:phase 1: Harmonisation of operating procedures (2004/2005)Phase 2: Rationalisation of operating systems (2004/2007)Phase 3: Transition to a choice between LCH.Clearnet Limited and LCH.Clearnet Sa for clearing and CCP services (2006/2007). February

38 Section 5 Major European clearing institutions Clearnet SA: Clearing and CCP services are provided to French, German, Dutch and Portuguese government bonds. Italian government debt is handled in conjunction with Cassa fi Compensazione e Garanzia. Clearnet SA currently supports the Brokertec, MTS France, MTS Italy, EuroMTS, Viel Prominoffi and e-speed fixed income trading platforms. LCH: Clearing and CCP services, both directly and through third party clearers, are provided for trades in German, Belgian, Dutch, Austrian, Portuguese, Finnish, Irish and UK government bonds as well as supranational and sovereign Eurobonds and Jumbo Pfandbriefe. US-dollar denominated eurobonds will be added in the near future. Trades in baskets of German government bonds, UK gilts and Euro12 general collateral are supported. LCH currently supports the Brokertec, EuroMTS and e-speed trading platform and Euroclear s ETCMS Regulatory approval The UK Office of Fair Trading has reviewed the merger and has decided not to refer to the UK Competition Commission for further investigation. In arriving at this decision, the Office of Fair Trading has come to the view that: The lack of competition between the parties for CCP clearing services onexchange and the limited use of such service off-exchange implies that the merger is unlikely to have a significant impact on horizontal competition. Notwithstanding third-party concerns, there appears to be no strong incentive on the part of the merged entity to allow Euronext to influence strategic decisions in its favour. A complex governance structure also limits Euronext s ability to discriminate against rival exchanges via its shareholding or position on the board. Moreover, the governance structure safeguards users and exchange interests. 5.2 Eurex Clearing Corporate structure Eurex Clearing AG is a wholly owned subsidiary of Eurex Frankfurt AG, founded in June 1998 under German law and registered in Frankfurt/Main. February

39 Section 5 Major European clearing institutions Figure 2: Eurex Clearing Structure Source: Products and markets Eurex Clearing AG currently is the clearing house for the following products and markets: Table 6: Eurex Clearing, clearing licenses Bonds Clearing License Equity Clearing License - Fixed-rate bonds of the Federal Republic of Germany or the Treuhandanstalt. - Jumbo Pfandbriefe of German issuers - Issues of the Kreditanstalt für Wiederaufbau (Reconstruction Loan Corporation), the European Investment Bank and the German Länder - Securities leg of basis trades* - Shares held in collective safe custody that are traded on the floor or via Xetra of Frankfurt Stock Exchange ** Eurex Clearing AG is the central counterparty for bonds traded on Eurex Bonds GmbH (since October 2000) and for on-exchange trades executed on either Xetra or the floor of the Frankfurt Stock Exchange in equities that are subject to collective safe custody, denominated in euro and listed on Xetra (since March 2003). It is not clear why the other stock exchanges in Germany February

40 Section 5 Major European clearing institutions have not migrated to a central counterparty arrangement or whether they intend to do it in the future. February

41 Section 6 Major European settlement institutions 6 Major European settlement institutions 6.1 National CSDs Table 7 below lists the main CSDs currently operating in the 15 Member States. Table 7: Member States CSDs Country Austria Belgium Name Oesterreichische Aktiengesellschaft (OeKB) Euronext - CIK Kontrollbank Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Norway Portugal Spain Sweden VP A/S - the Danish Securities Centre APK Euroclear France Clearstream Banking Frankfurt Central Securities Depositary S.A. (CSD) CRESTCo Limited Monte Titoli spa LuxClear Euroclear Netherlands The Norwegian Central Securities Depository (VPS) Interbolsa-Sociedade Gestora de Sistemas de Liquidação e de Sistemas Centralizados de Valores Mobiliários, S.A. IBERCLEAR VPC February

42 Section 6 Major European settlement institutions Table 7: Member States CSDs Country United Kingdom CRESTCo Limited Name We present each of these CSDs in some detail in the national sections of this report. In addition to the national CSDs, there exist two international CSDs (ICSDs) in Europe: Clearstream International and Euroclear Bank. In recent years, both ICSDs have acquired a number of national CSDs. 6.2 International CSDs (ICSDs) Clearstream Banking Luxembourg Corporate structure Clearstream International was formed in January 2000 through the merger of Cedel International (the Luxembourg-based ICSD) and Deutsche Börse Clearing (the German CSD). Deutsche Börse initially held a 50% stake in Clearstream International, but acquired Cedel s 50% stake on 11 July Clearstream International, a holding company incorporated in Luxembourg, has three main subsidiaries: " Clearstream Banking Luxembourg (CBL) which is the ICSD. " Clearstream Banking Frankfurt (CBF) which has taken over the business of the former Deutsche Börse Clearing and continues to operate under German law as a bank and as the German CSD. " LuxClear which is the Luxembourg CSD Prudential supervision and oversight CBL is a duly licensed credit institution incorporated under Luxembourg law and is thus authorised to carry out the complete range of banking activities. However, CBL s by-laws stipulate that its core business consists in acting as a depository and providing clearing and settlement services in respect of the securities that have been or are to be deposited with CBL. As a licensed credit institution, CBL is subject to supervision by the Commission de Supervision du Secteur Financier (CSSF) Participants Membership is open essentially to banks, broker-dealers, investment banks, central banks and CSDs. New members have to meet certain criteria when February

43 Section 6 Major European settlement institutions applying for membership and their credit standings are assessed on an ongoing basis. Criteria against which membership is assessed include the institution s net worth, its legal structure, its management reputation and the underlying country risk Types of services CBL offers a wide variety of services to major financial institutions from over 100 countries. These services can be grouped into three categories: " As an infrastructure: Clearing and settlement services -- which includes match making and netting between two counter parties. " As an intermediary: Custody services -- which includes safekeeping and servicing of financial assets on behalf of the owner. " As a financial intermediary: Banking and securities financing -- which includes providing liquidity and financing counter parties for their settlement needs; arranging securities financing services; and providing collateral management services. The most important source of revenue for Clearstream is custody services. Indeed, according to Deutsche Börse 2002 Annual Report, custody services accounted for 46 per cent of Clearstream revenue, followed by clearing and settlement services (30 per cent) and banking and securities financing (24 per cent) Euroclear Bank Corporate structure Euroclear Group reshaped its corporate structure in 2000 and 2001, transforming the Belgian company Euroclear Clearing System Société Coopérative into Euroclear Bank SA/NV, which now operates the Euroclear System and provides the services previously contracted to Morgan Guaranty Trust Company of New York, Brussels branch. Euroclear Bank is owned by Euroclear plc, a company organised under the laws of England and Wales and owned by market participants. The Euroclear System is operated by Euroclear Bank SA, a Belgian credit institution that was set up in 2000 for this purpose. Euroclear has developed a non-exclusive partnership with Euronext (resulting from the merger of the stock exchanges of Paris, Amsterdam, Brussels and Lisbon). In 2001, Euroclear acquired 100% of the capital of Sicovam, the French CSD and operator of the settlement system Relit and RGV, and in % of the capital of Necigef, the Dutch CSD. On this occasion, Euroclear also took a 20% stake in the capital of Clearnet, the French credit institution responsible for the clearing of Euronext transactions, and in 2004 Euroclear will acquire most of the settlement and custody business of CIK, the Belgian CSD. Since December 2000, Euroclear has also assumed responsibility for the settlement February

44 Section 6 Major European settlement institutions of Irish government bonds (Gilts) following the decision of the Irish government and the Central Bank of Ireland to delegate this activity to Euroclear. In September 2002, Euroclear Bank acquired 100% of the capital of CRESTCo, the British CSD that operates the real-time settlement systems settling UK, Irish and international securities through the CREST system. 21 According to Euroclear, Euroclear is market-owned and market-governed. Both Euroclear plc and Euroclear Bank have independent Boards of Directors. Composed of representatives of Euroclear users (major securities market actors), and of former shareholders of merged companies (Euroclear France and CRESTCo), the Euroclear plc Board makes the strategic decisions for the group. The Board is assisted by several committees comprising Non- Executive Directors. The Euroclear Bank Board is composed of 18 Directors, 12 of whom are Non- Executive Directors and are also members of the Euroclear plc Board. The six Executive Directors represent the Bank s Management Committee. The Group s structure is as follows: 21 When Euroclear bought CrestCo, it promised that by 2008 members would reap the benefits of a single platform for a host of custody, securities lending and collateral management services, as well as a single interface and single set of tariffs. The long lead allows Euroclear to figure out how to offer the best functionality from multiple platforms now residing at Euroclear Bank in Brussels, CrestCo, Euroclear France, Euroclear Netherlands and Euronext CIK. There are suggestions that even the 2008 schedule may slide. Euroclear recently said that intermediate steps in 2005 to provide a consolidated settlement engine could be pushed back to ensure that the depository meets the standards proposed by the Giovannini report on harmonising European post-trade clearance and settlement practices. Euroclear sought to minimise the impact of its disclosure by coinciding it with the announcement of a $14 million in fee reductions in 2004, when Euroclear launches direct links with Euronext Brussels and Euronext Amsterdam. It already had direct link with Euronext Paris, which has resulted in some major price cuts for French equities settlement as well. February

45 Section 6 Major European settlement institutions Figure 3: Euroclear Group Source: Like Clearstream Banking Luxembourg, Euroclear Bank s activity is not limited to being a settlement infrastructure. Indeed, as discussed in Section 2, Euroclear Bank offers, in addition to securities settlement services, custody services and acts as an intermediary providing investors access to national CSDs (whether owned or not by Euroclear Bank). As a limited purpose bank, Euroclear Bank also provides system participants with banking services in relation to settlement activity, including credit, securities lending and borrowing as well as collateral management services Oversight and prudential supervision Incorporated in Belgium, Euroclear Bank is subject to the supervision of the Belgian Banking and Finance Commission (BFC). In accordance with Article 8 of its Organic Law, the National Bank of Belgium (NBB) is in charge of the oversight of the Euroclear System. Supervisors and overseers work in close cooperation in the implementation of their respective responsibilities at Euroclear Bank 22. Euroclear plc (see below) is also authorised as a service company by the Financial Services Authority in the United Kingdom. As a consequence of the ongoing consolidation process, a cooperative oversight framework based on Memoranda of Understanding (MoU) between interested authorities was created. The international cooperation, which is based on the lead oversight and lead supervision principle, currently 22 As noted earlier, the European System of Central Banks (ECSB) and Committee of European Securities Regulators (CESR) are currently working on the development of clearing and settlement standards. These would apply to Euroclear as well as other significant providers of settlement services in Europe. February

46 Section 6 Major European settlement institutions involves relevant authorities from France, the Netherlands and Ireland. The cooperation agreements aim at allowing each authority to implement its own competencies, promote the efficiency of the controls through a homogeneous approach and streamline the requirements to Euroclear avoiding redundancies Participants The Euroclear System currently has about 2,000 participants from more than 80 different countries, the vast majority of which are banks, broker-dealers and other institutions professionally engaged in managing new issues of securities, market-making, trading or holding the wide variety of securities accepted by the System. Applicants must meet four criteria to be admitted: adequate financial resources, technological ability to use the Euroclear System, need to use the Euroclear System, and sound reputation in the market. In addition, internal anti-money laundering measures of the applicant institution are considered prior to any admission Types of transactions handled Over 190,000 national and international securities are accepted in the System, covering a broad range of internationally traded fixed and floating rate debt instruments, convertibles, warrants and equities. This includes domestic debt instruments, short- and medium-term instruments, equities and equity-linked instruments as well as international bonds from the major markets of Europe, Asia-Pacific, Africa and the Americas. The securities deposited by the participants in the Euroclear System 23 are typically subdeposited with a network of more than 70 custodians (called depositories), who are banks, central banks or SSSs generally located in the country of issuance or liquidity of the security, covering 32 markets. Some of those custodians in turn may subdeposit the securities with their own subcustodians, typically SSSs. International securities (such as eurobonds) are typically subdeposited with banks that act as custodians for Euroclear Bank or as common depositories for Euroclear Bank and Clearstream Banking. Euroclear Bank also enters into a Depositary Agreement with each depositary which, as a rule, confirms, among other things, that it has no ownership interest in securities it holds for Euroclear Bank and that such securities are freely transferable, except (in certain instances) for a limited right of retention for safekeeping fees charged by the depositary. 23 Securities deposited with Euroclear in its role as an ICSD are securities such as Eurobonds, not domestic securities. Domestic securities are deposited with the national CSDs, which may or may not be part of the Euroclear Group. February

47 Section 6 Major European settlement institutions Proposed Restructuring of the Euroclear Group On 10 th October, 2003, the Board of Euroclear plc announced its intention to restructure the Euroclear group. The new structure will be subject to review by regulatory authorities. A decision of the Board of Euroclear is expected in early 2004 and implementation of the restructuring is targeted for year-end 2004, subject to appropriate approvals and consents. According to Euroclear s press release, the main thrust of the Board s intended corporate structure consists of forming a new company, to be called Euroclear SA/NV. Incorporated in Belgium, the new company would own and operate the Single Settlement Engine, and more generally, provide shared services to all Euroclear group entities. It is also proposed that Euroclear Bank, the ICSD, and each of the national CSDs: CRESTCo, Euroclear France and Euroclear Netherlands would become sister subsidiaries of Euroclear SA/NV. Clients would continue to access Euroclear services through Euroclear Bank and the CSDs, rather than through the new company, as this new company would only provide services to the other Euroclear group entities, not to clients. Euroclear hopes that the new structure would ally concerns expressed by competitors, such as the Fair & Clear group 24, who claim that Euroclear competes unfairly in the settlement business by using revenues from its central depositories to subsidise its banking business, allowing it to offer settlement services at heavily discounted rates. The new structure would also provide a more formalised transparency on the cost allocations relating to the Single Settlement Engine and other shared services across the various CSDs and the ICSD of the Euroclear group. Euroclear also undertook to promote transparency, with respect to intercompany cost allocations and avoidance of any cross-subsidy, by committing to commission an annual independent auditor report on Euroclear s compliance with OECD transfer-pricing principles relating to cost allocations and attesting that Euroclear group entities are applying these principles in all material aspects The Fair and Clear Group comprises a number of agent banks, such as BNP Paribas Securities, Citibank, Kas Bank and Den norske Bank. It was formed about two years ago amid concerns over Euroclear s expansion into the cross-border equities settlement business through the acquisition of first of the French, then the UK, Belgian, Dutch and Portuguese depositories 25 To our knowledge, no other settlement service provider produces such an independent report. February

48 Section 6 Major European settlement institutions Figure 4: Euronext and EuroClear Exchange Euronext Euronext (Belgium, France, France, The The Netherlands, Portugal) Portugal) Euronext. liffe liffe (Belgium, France, France, The The Netherlands, Portugal, UK) UK) LSE LSE (UK) (UK) IPE IPE (UK) (UK) LME LME (UK) (UK) ISE ISE (Ireland) Clearing LCH.Clearnet (Clearnet (Clearnet will will be be owned owned 45.1% 45.1% by by users, users, 41.5% 41.5% by by Euronext, Euronext, 9.8% 9.8% by by Euroclear Euroclear,, 2.7% 2.7% by by LME LME and and 0.9% 0.9% by by IPE. IPE. Initially Initially Clearnet Clearnet and and LCH LCH will will remain remain distinct distinct fro fro m each each other, other, but but be be integrated in in phases phases during during the the next next three three to to four four years.) years.) Settlement CIK CIK (Belgium*) (Belgium) Interbolsa Interbolsa (Portugal) Euroclear --CRESTCo (Belgium**, (Belgium, France, France, Ireland, Ireland, The The Netherlands, UK) Portugal, UK) (Euroclear and Clearstream operate clearing and settlement in tandem in th e MTS markets of Italy Eurobonds, The Netherlands and Portugal) Austria, Finland, Germany, Ireland, * Mainly physical securities ** CIK Book entry business February

49 Section 6 Major European settlement institutions February

50 Section 6 Major European settlement institutions Figure 5: Clearstream and Eurex Settlement Clearing Exchange otob otob market.at market.at (Czech (Czech Republic, Republic, Hungary, Hungary, Poland) Poland) Clearing and Settlement Arranged at National Level VSE VSE (Austria) (Austria) LSE LSE (Lux) (Lux) Clearstream Clearstream (DB: (DB: all all trades trades other other than than on on Xetra) Xetra) Deutsche Deutsche Börse Börse Euroclear Euroclear (some (some MTS MTS Germany) Germany) HEX HEX derivatives derivatives (Finland) (Finland) Eurex Eurex (Germany, (Germany, Switzerland) Switzerland) Eurex EurexClearing (CCP) (CCP) (DB: (DB: Xetra Xetra trades) trades) OMHEX OMHEX (Finland, (Finland, Sweden, Sweden, Estonia, Estonia, Latvia) Latvia) SWX SWX (Switzerland) (Switzerland) Clearing and Settlement Arranged at National Level February

51 Section 7 Overview 7 Overview PART II National Infrastructures In each of the country reports we provide an overview of the national trading, clearing and settlement infrastructure, review access conditions to these platforms and determine whether exclusive arrangements do exist. The nature and depth of the information varies across countries, depending on the availability of public information on trading, clearing and settlement arrangements. The country reports for the 15 Member States are presented first. Next, we present the country reports for the 10 New Member States. February

52 Section 8 Austria 8 Austria Exchange The Vienna Stock Exchange/ Wiener Börse is the only securities exchange and listing authority in Austria and offers, in addition to the traditional cash market (equity market, bond market), a derivatives market (otob market) and warrants market. All trading on Wiener Börse is conducted through the fully electronically trading systems, Xetra (cash market) and OMex (derivatives, warrants). Trades at the Vienna Stock Exchange are cleared and settled pursuant to separate rules and regulations of the Vienna Stock Exchange ( Arrangementordnung ) Clearing and settlement All securities traded on the cash market are cleared and settled under the clearing and settlement system of the Wiener Börse AG. Oesterreichische Kontrollbank (OeKB) 26 is responsible for the settlement of all trades and provides clearing services for the equity market segment. It acts as a clearing agency for the so-called Arrangement, the clearing system performing functions like netting, organising default management and collateral management but OeKB does not take over any risks in the sense of a CCP. On the derivatives market, the Wiener Börse is a neutral clearing agent and enters into every contract as a counterparty. The Wiener Börse guarantees the fulfilment of the contracts under a system requiring the deposit of security (margins) by the participating institutions CSD Oesterreichische Kontrollbank AG (OeKB) acts as a Austrian Central Securities Depository (CSD). It operates the Wertpapiersammelbank (WSB), which is the only domestic system providing a trade matching service for securities settled in the WSB. The rules and procedures governing the rights and obligations of participants and the duties of the WSB are laid down in the business terms of the WSB. The WSB is the only domestic provider of a trade matching service for securities settled in the WSB. In the case of foreign securities that are traded cross border, the relevant foreign CSD or custodian is responsible for trade matching. 26 The Oesterreichische Kontrollbank (OeKB) is a specialised financial institution owned by the Austrian commercial banks. February

53 Section 8 Austria The rules and procedures governing the rights and obligations of participants and the duties of the WSB are laid down in the business terms of WSB. However, trades at the Vienna Stock Exchange are settled pursuant to separate rules and regulations of the Vienna Stock Exchange ( Arrangementordnung ). Figure 6: Austria securities systems trade clearing settlement Wiener Börse (Vienna Stock Exchange) Xetra, Omex Arrangementordnung Derivatives Wiener Börse CCP Arrangementordnung Equity OeKB not CCP OeKB not CCP OeKB (CSD) operates WSB (SSS) Other 8.2 Access The access and exit criteria for participating in the WSB are part of the WSB s terms of business and the clearing rules and regulations of the Vienna Stock Exchange ( Arrangementordnung ). All participants are subject to the same rules and procedures. Credit and other financial institutions as defined by the EU Investment Services Directive, brokers at the Vienna Stock Exchange, foreign CSDs and clearing institutions can become participants in the WSB. Applicants have to provide a written application stating their business intentions and expected volumes, and a copy of their latest annual report. They are also required to be subject to the financial supervision within their home country. All institutions, which fulfil the preconditions listed in Art 5 of the Austrian Banking Act, are entitled to such a license issued by the FMA (i.e. license to undertake banking transactions). Thus all institutions, which are in possession of such a license, can undertake the business of administration and the keeping of securities. When doing so, the Austrian Securities Deposit Act has to be also complied with. February

54 Section 8 Austria The Austrian Securities Deposit Act provides for a custodian to either be in the possession of the above-mentioned license or a special empowerment by the Austrian legislator (Art 1 para 2). Further Art 1 para 3 empowers the Minister of Finance to issue a special regulation on the set up of an institution, which on the one hand acts as Austrian Central Securities Depositary for all Austrian banks and on the other hand also provides all kinds of clearing and settlement services (like all other Austrian custodians). This function is currently exercised by the OeKB. The Austrian Financial Market Authority is empowered to supervise the custodian s compliance with the Austrian Banking Act and Austrian Securities Deposit Act. 8.3 Exclusive arrangements To the extent that all transactions are cleared and settled through OeKB, one could argue that an exclusive arrangement exists although we have not been able to identify the precise source of this exclusivity. February

55 Section 9 Belgium 9 Belgium 9.1 Trading Exchanges: corporate structure/products Table 8: Overview of Euronext Markets Exchanges Types of securities Operated by Primary market 1 Shares, bonds, loans, rightsmarket 1 Euronext Brussels Secondary market Real estate certificates Euronext Brussels Euro.NM Belgium Growth companies Euronext Brussels Trading Facility Financial instruments already negotiated on another market Euronext Brussels BXS Derivatives 2 Derivatives market Euronext Brussels NOTE: (1) Most securities are traded on that market. (2) Formerly Belfox (Belgium Futures and Options Exchange) In addition to the five regulated markets mentioned above (four cash markets and one derivatives market), Euronext Brussels operates a non-regulated market -- The Public Auction market -- where members trade securities that are not listed on any other Euronext Brussels market. There is also a regulated off-exchange market for linear bonds, strips and Treasury certificates (established by the Royal Decree of 22 December 1995). The majority of the secondary market transactions are OTC transactions. Since 1999, some Belgian long-term dematerialised public debt instruments have been traded on Euro-MTS. MTS Belgium, established in May 2000, serves the domestic bond market. The following are members of the regulated off-exchange market: " Investment undertakings and credit institutions governed by Belgian law; " Subsidiaries established in Belgium of investment undertakings and credit institutions governed by the law of another country; " Primary dealers in securities of the Belgian Treasury; and February

56 Section 9 Belgium " Such investment undertakings and credit institutions governed by the law of another country that have applied to be members. Euronext Brussels S.A. is a wholly-owned subsidiary of Euronext N.V., a holding company governed by Dutch law. Euronext Brussels is a sister corporation of Euronext Paris, Euronext Amsterdam and Euronext Lisbon. Figure 7: Structure of the Euronext Group Euronext NV 41.5% LCH.Clearnet 100% 100% 100% 100% Euronext Paris Euronext Amsterdam Euronext Brussels Euronext Lisbon Access Access to regulated and electronic markets is subject to three types of requirements: intermediary s authorisation status, general conditions for access to the Belgian regulated market and conditions set by individual exchanges or systems. We have reviewed the Euronext Rule Book 27 governing the contractual relationship between Euronext exchanges and trading members: Under requirements for Euronext Securities Membership 28, it is specified that: 27 The Euronext Brussels Rule Book has been formally established by the Euronext Brussels Managing Board and has been approved by the Belgian Minister of Finance, on the advice of the Banking and Finance Commission. It comprises both harmonised rules such as membership rules. The Banking and Finance Commission is the market authority for Euronext Brussels. It has concluded a memorandum of understanding with the market authorities of the French and Dutch Euronext markets regarding the regulation and supervision of Euronext. 28 Euronext Rules Book - Latest update 16 January February

57 Section 9 Belgium Each prospective Member must be, or irrevocably undertake to become, a Clearing Member, or alternatively, must have entered into a Clearing Agreement or hold an irrevocable written commitment of a Clearing Member to enter into such an agreement. A Clearing Member is defined as: Any Person authorised by the Clearing House to clear Transactions accordance with the relevant provisions of the Clearing Rule Book. A Clearing House is defined as: Clearnet or London Clearing House, as the case may be. So, it appears that there is a contractual obligation imposed on Euronext Brussels trading members to clear transactions with LCH.Clearnet SA in the case of securities transactions executed on Euronext Brussels Clearing There are currently 2 clearing organisations in Belgium: LCH.Clearnet SA and the National Bank of Belgium Securities Settlement System. Provided certain prudential requirements are met, any organisation can be recognised as clearing institution under the Law of 2 nd August 2002 concerning the supervision of the financial sector and financial services. in Corporate structure Following the merger between the French, Belgian and Dutch clearing houses, Clearnet SA became, in February 2001, the sole clearing house and central counterparty for markets operated by Euronext 30. In June 2003, London Clearing House (LCH), UK s largest, member-owned, clearing house, and Clearnet SA announced their intention to merge to become LCH.Clearnet SA. The merger was completed on 22 nd December Details of the agreement are provided in Section 5. NBB SSS, the other clearing organisation, is fully owned and operated by the National Bank of Belgium Products and markets LCH.Clearnet SA offers its clearing services both to organized markets (stock exchanges, derivatives markets) and to OTC markets (bonds and repos). 29 The same contractual obligation to clear transactions with LCH.Clearnet SA is imposed on trading members of Euronext Paris, Euronext Amsterdam and Euronext Lisbon. 30 In November 2003, Clearnet SA also became the sole clearer for the Lisbon cash market which joined Euronext in February

58 Section 9 Belgium Thus, the institution clears equity securities, debt securities, warrants, convertible bonds, preferential subscription rights, derivatives on shares and indices, interest-rate derivatives, commodity and energy derivatives. NBB SSS clears transactions on book-entry transfers of bearer securities. The securities settlement system settles primary-market transactions (i.e. new issues) and secondary-market transactions (i.e. transactions on previously issued financial instruments). The securities settlement system is primarily used for Belgian Government securities: linear bonds, Treasury certificates, Belgian treasury bills, bearer bonds issued by the Belgian State and strips of linear bonds. It also settles transactions on treasury bills and certificates of deposits issued by private firms and credit institutions Role as central counterparty LCH.Clearnet SA Brussels Branch acts as a central counterparty for securities traded on Euronext Brussels markets. NBB SSS does not act as a central counterparty Access As regards conditions for access, LCH.Clearnet SA selects its clearing members on the basis of regulatory and financial criteria. Applicants must meet capital requirements, which vary according to the activity segment concerned. Following the integration of the Paris, Brussels and Amsterdam markets, membership rules were harmonized. We have reviewed LCH.Clearnet SA Clearing Rule Book -- Title III Local Provisions for Belgian Clearing Members 32. Under Chapter 4 Membership Requirements, it is stipulated that: Each Clearing member clearing Securities and warrants has to open an account with the Belgian National Bank (Banque Nationale de Belgique/National Bank van Belgïe) and a Securities Account with CIK, or pursuant to articles abd following, to open these accounts through a Payment Agent or a Settlement Agent in order to ensure proper settlement of his obligations vis à vis Clearnet (LCH.Clearnet).. This suggests a contractual obligation for LCH.Clearnet SA clearing members to settle securities transactions with Euronext CIK (as will be discussed later, there is an agreement between Euronext and Euroclear 31 National Bank of Belgium, Securities Clearing System of the National Bank of Belgium: Disclosure Framework Report on the basis of the questionnaire published by the CPSS(BIS) and IOSCO. May Dated 21st March February

59 Section 9 Belgium relating to which transactions will be settled through Euronext CIK and which one will be forwarded to Euroclear Bank). Figure 8: Belgium securities systems trade Euronext Brussels Secondary offexchange market clearing LCH.Clearnet NBB settlement Euronext CIK Euroclear 9.3 Settlement There are currently 3 organisations involved in settlement in Belgium: Euronext CIK, Euroclear Bank and the National Bank of Belgium Securities Settlement System (NBB SSS). Provided certain prudential requirements are met, any organisation can be recognised as settlement institution under the Law of 2 nd August 2002 concerning the supervision of the financial sector and financial services Corporate structure Euronext CIK Euronext CIK, a company governed by Belgian law and wholly-owned subsidiary of Euronext Brussels, provides settlement and delivery as well as back-office services for transactions on financial instruments traded on regulated markets (i.e. Euronext Brussels) and OTC markets. Euronext CIK operates as national central depository for issuances governed by Belgian law (as based on the provisions of the above-mentioned Royal Decree 62) and has February

60 Section 9 Belgium the status of settlement institution within the meaning of Article 23 of the above-mentioned Law of 2 August Euroclear Bank Euroclear Bank, a bank governed by Belgian law and authorized by the Belgian Banking and Finance Commission (BFC), has been operating the Euroclear settlement and delivery system since 1 January Euroclear Bank has the status of settlement institution within the meaning of both Royal Decree 62 of 10 November 1967 concerning promotion of the circulation of securities and Article 23 of the Law of 2 August NBB SSS NBB is fully owned and operated by the National Bank of Belgium Products and markets Agreement between Euronext and Euroclear In August 2002, Euroclear Bank was appointed Belgian CSD alongside the existing CSD, Euronext CIK. This followed the agreement with Euronext to transfer Euronext CIK s book-entry settlement and custody business book to Euroclear Bank. Physical securities transactions for Belgium customers will continue to be performed by Euronext CIK. In its 2002 annual report 33, Euroclear Bank indicated that it will work closely with Euronext CIK to ensure that this transfer of book-entry settlement and custody business for Belgium securities is successful. It will also work to offer customers the possibility of choosing to settle Euronext Belgium trades with Euronext CIK or directly within Euroclear Bank. Notwithstanding this integration, Euronext CIK is expected to keep on executing a significant amount of transactions on physical securities for retail activities of Belgian bankers and brokers, and for transactions on units of Belgian and Luxembourg sicavs/beveks and bank savings certificates (bons de caisse / kasbons) issued by Belgian banks. NBB SSS The NBB is a securities settlement institution within the meaning of Royal Decree 62 of 10 November Its clearing system clears transactions on book-entry transfers of bearer securities. The securities settlement system settles primary-market transactions (i.e. new issues) and secondary-market transactions (i.e. transactions on previously issued financial instruments). 33 Published 28 May February

61 Section 9 Belgium The securities settlement system is primarily used for Belgian Government securities: linear bonds, Treasury certificates, Belgian treasury bills, bearer bonds issued by the Belgian State and strips of linear bonds. It also settles transactions on treasury bills and certificates of deposits issued by private firms and credit institutions 34. According to the Bank of International Settlement 35, the bulk of OTC transactions, including EuroMTS and MTS Belgian transactions are settled through the NBB SSS Proposed restructuring of Euroclear On 10th October, 2003, the Board of Euroclear plc announced its intention to restructure the Euroclear group. The new structure will be subject to review by regulatory authorities. A decision of the Board of Euroclear is expected in early 2004 and implementation of the restructuring is targeted for year-end 2004, subject to appropriate approvals and consents. According to Euroclear s press release, the main thrust of the Board s intended corporate structure consists of forming a new company, to be called Euroclear SA/NV. Incorporated in Belgium, the new company would own and operate the Single Settlement Engine, and more generally, provide shared services to all Euroclear group entities. It is also proposed that Euroclear Bank, the ICSD, and each of the national CSDs: CRESTCo, Euroclear France and Euroclear Netherlands would become sister subsidiaries of Euroclear SA/NV. Clients would continue to access Euroclear services through Euroclear Bank and the CSDs, rather than through the new company, as this new company would only provide services to the other Euroclear group entities, not to clients. Euroclear hopes that the new structure would ally concerns expressed by competitors, such as the Fair & Clear group 36, who claim that Euroclear competes unfairly in the settlement business by using revenues from central depositories to subsidise its banking business, allowing it to offer settlement services at heavily discounted rates. The new structure would also provide a more formalised transparency on the cost allocations relating to the Single Settlement Engine and other shared services across the various CSDs and the ICSD of the Euroclear group. Euroclear also undertook to promote transparency, with respect to intercompany cost allocations and avoidance of any cross-subsidy, by committing 34 National Bank of Belgium, Securities Clearing System of the National Bank of Belgium: Disclosure Framework Report on the basis of the questionnaire published by the CPSS(BIS) and IOSCO. May CPSS(BIS) Red Book 2003, Payments Systems in Belgium. 36 The Fair and Clear Group comprises a number of agent banks, such as BNP Paribas Securities, Citibank, Kas Bank and Den norske Bank. It was formed about two years ago amid concerns over Euroclear s expansion into the cross-border equities settlement business through the acquisition of first of the French, then the UK, Belgian, Dutch and Portuguese depositories February

62 Section 9 Belgium to commission an annual independent auditor report on Euroclear s compliance with OECD transfer-pricing principles relating to cost allocations and attesting that Euroclear group entities are applying these principles in all material aspects Access Euronext CIK Euronext CIK membership is open to natural persons, companies or institutions that are legally empowered to receive, either in Belgium or abroad, sell and buy orders on listed or unlisted securities, to companies or institutions that carry out in Belgium the activities authorized for private savings banks, to organizations carrying out, abroad, activities that are similar to Euronext CIK s, and to certain other organisations. Euroclear Bank The selection of applicants by Euroclear Bank s Admission Committee is based on the following four main criteria: financial resources; technical capability; need for Euroclear's services; and reputation in the market NBB SSS The NBB SSS has a single category of members, the direct participants which include the following types of organisations: credit institutions or stockbreeding firms established in a Member State of the European Union, the Treasury administration, the NBB, Clearstream, Euroclear and other SSS. 9.4 Exclusive arrangements As indicated earlier, the Belgian legislation allows the establishment and recognition of new clearing and settlement organisations, provided that certain conditions are met. These conditions are prudential in nature and can be found in the Law of 2 nd August 2002 concerning the supervision of the financial sector and financial services. This leads us to conclude that the Belgium legislation does not support exclusivity for any organisation in the area of clearing and settlement because there is no legal prohibition preventing a competing infrastructure service provider from entering the market. However, our review of the Euronext Rule Book and LCH.Clearnet SA Clearing Rule Book suggests that there are a number of exclusive 37 To our knowledge, no other settlement service provider produces such an independent report. February

63 Section 9 Belgium arrangements for both clearing and settlement arising from the contractual obligations set out in these documents: # Euronext Brussels trading members must clear transactions with Clearnet SA in the case of securities transactions executed on Euronext Brussels; # LCH.Clearnet SA clearing members must settle transactions with Euronext CIK. This conclusion is based on a review of publicly available documents. We did not have access to any possible agreement between the various organisations involved in clearing and settlement in Belgium, whether that be a clearing agreement between Euronext Brussels and LCH.Clearnet SA or a settlement agreement between Euronext, LCH.Clearning SA (or its owner) and Euroclear. Furthermore, having not discussed these issues with Euronext Brussels, LCH.Clearnet SA and Euronext CIK, we are not in a position to say that it would definitely not be possible to clear a Euronext Brussels transaction through a different clearing organisation than LCH.Clearnet SA or settle a Euronext Brussels transactions through a different settlement organisation than Euronext CIK or Euroclear Bank. Finally, we would note that the Euroclear group has indicated in its documentation that Euronext Brussels participants have the choice to settle their transactions on either Euronext CIK or Euroclear Bank. In practice, the choice of settlement organisation depends on the type of transactions: physical securities transactions are channelled to Euronext CIK while bookentry settlement and custody business is channelled to Euroclear Bank. This amounts to segmentation of the market rather than competition between two organisations for the provision of the same service. Table 9: Overview of exclusive arrangement in clearing and settlement Trading Euronext Brussels BruBrussels Off-exchange market Clearing LCH.Clearnet SA NBB SSS CCP Yes No Settlement Euronext CIK 1 or Euroclear Bank 2 NBB SSS NOTE: (1) Physical securities transfers (2) Book-entry settlement and custody. February

64 Section 10 Denmark 10 Denmark 10.1 Major market institutions Exchanges Under Danish law it is possible to establish two types of regulated markets, a stock exchange and an authorised market. Københavns Fondsbørs A/S (Copenhagen Stock Exchange A/S) The company Copenhagen Stock Exchange A/S runs two different markets, a stock exchange proper as well as an authorised market, the XtraMarked. The stock exchange processes stocks, bonds, units of investment associations and derivatives (futures and options), the XtraMarked trades units of investment associations that are not listed on the stock exchange proper. To be allowed to trade on the Copenhagen Stock Exchange it is necessary to participate in the clearing system operated by VP Securities Services 38 (see below). Dansk Autoriseret Markedsplads A/S (Danish Authorized Market Place A/S). This company runs an authorized market. Types of securities processed: Stocks Central counterparties There are currently no central counterparties operating under Danish law Clearing and settlement institutions FUTOP Clearingcentralen A/S (The FUTOP Clearing Centre A/S). This company conducts clearing and settlement activities in connection with the trade in derivatives on the Copenhagen Stock Exchange. Værdipapircentralen A/S (VP Securities Services A/S). This company conducts clearing and settlement as well as registration activities in connection with trades in securities. Transactions in listed stocks, bonds and investment fund units are cleared and settled through VP. 38 VP Securities Services, Market Practice in Denmark, A general description of the Danish Securities market, May February

65 Section 10 Denmark 10.2 Ownership All the institutions in charge of running the above markets are organized as public limited companies. Københavns Fondsbørs A/S The limited company Københavns Fondsbørs A/S was formed in Before 1996 the stock exchange was organized as a private, independent organization. The share capital in the new company was distributed according to the following ratios: 60 % owned by the members of the stock exchange 20 % owned by issuers of stocks listed on the exchange 20 % owned by issuers of bonds listed on the exchange Currently four shareholders all members of the stock exchange own more than 5 % of the share capital. Dansk Autoriseret Markedsplads A/S Dansk Autoriseret Markedsplads A/S is a wholly owned subsidiary of O.T.C. Holding A/S. The latter is owned by two companies; Retega A/S (65 %) and Spar Nord A/S (35 %). FUTOP Clearingcentralen A/S FUTOP Clearingcentralen A/S is a wholly owned subsidiary of Københavns Fondsbørs A/S. Værdipapircentralen A/S Værdipapircentralen was established in 1980 as a private, independent nonprofit organization. In 2000 Værdipapircentralen was converted into a limited company, Værdipapircentralen A/S. The company's shareholders are made up of players on the securities market; bank and investment companies (currently approximately 32%), bond issuing companies (currently 28%), Denmark s central bank (currently approximately 24%), share issuers (currently approximately 8 %) and institutional investors (currently approximately 8%) Access Only access for traders is described. There are separate rules governing access for issuers of securities. Basic conditions for access are set down in the Securities Trading Act whereas the systems/institutions themselves have formulated more detailed February

66 Section 10 Denmark conditions for access. The following comments only apply to the statutory conditions for access. Non-national institutions/companies have access to stock exchanges on the same conditions as nationals provided they have been granted an authorization in another country in the European Union or in countries with which the Community has concluded a cooperation agreement. Access to clearing and settlement institutions Pursuant to Section 54(2) of the Securities Trading Act only securities dealers (credit institutions, investment companies and mortgage credit institutes), clearing centres, the Danish Financial Administration Agency and Danmarks Nationalbank shall be entitled to clear and settle transaction on behalf of third parties. There are no statutory limits on who shall be entitled to clear and settle transactions on their own behalf. Pursuant to Section 54(4) the clearing centre itself shall lay down rules governing the affiliation as a clearing participant, including the conditions to be satisfied by the clearing participants in order to participate in clearing and settlement of own, a third party's or own and a third party's transactions. There are no further statutory rules governing access to a clearing centre but pursuant to Section 52(1) of the Securities Trading Act the Board of Directors of a clearing centre shall be responsible for the business activities of the centre being conducted in an adequate and proper manner. Figure 9: Denmark securities systems trade Copenhagen Stock Exchange Danish Authorised Market Place clearing settlement FUTOP (for derivatives) VP Securities Services (for stocks, bonds, investment fund units) February

67 Section 10 Denmark 10.4 Exclusive arrangements There are no provisions under Danish legislation granting exclusive rights to a specific company in relation to activities in trading, clearing or settlement. Copenhagen Stock Exchange used to have a legal monopoly on operating a stock exchange but this monopoly was abolished with the enactment of the Securities Trading Act in Similarly, there are no statutory provisions obliging parties to conduct their trading, clearing or settlement activities through a specific market or infrastructure. No legislative provisions provide for trading, clearing or settlement activities to be conducted through a single company, institution or system. The Securities Trading Act lay down the conditions for operating a stock exchange, authorized market and clearing centre. Such institutions can only be operated with a prior authorization by the Danish Financial Supervisory Authority. Pursuant to Section 8(2) of the Securities Trading Act the conditions for such authorization shall be: That the business is carried on by a limited company registered with the Danish Commerce and Companies Agency (Erhvervs- og Selskabsstyrelsen), That the company has a share capital of at least DKK 40 million if the company is a stock exchange or clearing centre and DKK 8 million if the company is an authorized market, That a programme of operations, procedures as well as control and safeguard arrangements has been prepared. A clearing centre authorization shall also be conditional upon the inclusion of provisions pursuant to Section 57c of the Securities Trading Act in the prevailing rules and participation agreement of the relevant clearing centre. Pursuant to Section 57c these provisions must contain rules on when a transfer order is considered entered into the system, and the point/s in time after which a registered transfer order can no longer be revoked by a participant or a third party. However, as the membership rules of the Copenhagen Stock Exchange specify that to become a member of the stock exchange, one needs also to be a member of VP Securities Services A/S, we are of the view that an exclusive arrangement does exist as a result of the stock exchange s regulation. MTS Denmark also requires participants to subscribe to VP Securities Services A/S for clearing and settlements. February

68 Section 11 Finland 11 Finland 11.1 Trading Helsinki Stock Exchange HEX Integrated Markets Oy is northern Europe's largest securities market. Through its exchange operations within Stockholmsbörsen, HEX Helsinki, HEX Tallinn and HEX Riga, it offers investors access to 80 percent of the Nordic equity market and 75 percent of the Baltic equity market. HEX Integrated Markets also operates CSDs in Finland, Estonia and Latvia. HEX Oy is a public limited company, which owns stock exchanges and securities depositories in Finland, Estonia and Latvia. The company also offering various kinds of services to the central parties on the market. HEX Oy was recently acquired by OM AB. Helsingin Arvopaperi- ja johdannaispörssi, selvitysyhtiö Oy (the Helsinki Stock Exchange) carries out stock exchange operations, derivatives exchange operations and option trade settlement operations on the basis of a permision granted by the Finnish Ministry of Finance. The Helsinki Stock Exchange also organises other types of public trading of securities (I-lista, NM-lista, Prelista, ML-markkina) in accordance with the regulations approved by the Finnish Ministry of Finance. MTS Finland In addition, there is an electronic quotation for platform for public debt securities in Finland. MTS Finland, which began trading in April, was established for the purpose of trading Euro-denominated debt securities issues by the Finnish government. Trading on MTS is conducted via the Telematico system Clearing and settlement Suomen Arvopaperikeskus Oy (APK), part of the Hex group, carries out the operations of a securities depository on the basis of a permission granted by the Finnish Government, and those of a clearinghouse on the basis of a permission granted by the Finnish Ministry of Finance. The Helsinki Stock Exchange requires that cash transactions be cleared and settled by APK. Furthermore, the Helsinki Stock Exchange requires that derivatives transactions be cleared and settled in the Helsinki Stock Exchange. Settlement of debt securities trades executed on MTS Finland is conducted by Euroclear and Clearstream Banking, both of which are International Central Securities Depositories. February

69 Section 11 Finland 11.3 Exclusive arrangements While Finnish legislation does not stipulate any exclusive arrangement, it appears that there is an obligation imposed on Helsinki Stock Exchange cash trading members to clear and settle transactions with APK. The Helsinki Stock Exchange and APK are both part of the HEX Integrated Markets Oy. We did not discuss these matters with the Helsinki Stock Exchange and are not in a position to indicate whether there is any flexibility for a prospective member to clear or settle equities transactions with another clearing or settlement organisation. Figure 10: Finland securities system trade HEX clearing settlement APK February

70 Section 12 France 12 France 12.1 Trading Exchanges: corporate structure/products and markets Table 10: Overview of Euronext Markets Exchanges Types of securities Operated by Paris Bourse (1) Equities, debt obligations, warrants, trackers Euronext Paris Nouveau Marché Equities, debt obligations Euronext Paris MONEP (Marché des Options Négociables de Paris MATIF (Marché à Terme International de France) Equity derivatives Interest rate derivatives and commodity derivatives Euronext Paris Euronext Paris NOTE: (1) Includes Premier Marché (largest French and foreign companies), Second Marché (mediumsized French and foreign companies) and Marché des EDR. Source: Response to questionnaire provided by French authorities In addition to the four regulated markets mentioned above (two cash markets and two derivatives markets), Euronext Paris manages an organised cash market dedicated to the trading of non-officially listed securities: the Marché Libre OTC. Euronext Paris is a French company wholly-owned by Euronext NV, A Dutch company listed on the Paris Bourse. February

71 Section 12 France Figure 11: Structure of Euronext Group Euronext NV 41.5% LCH.Clearnet 100% 100% 100% 100% Euronext Paris Euronext Amsterdam Euronext Brussels Euronext Lisbon Moreover, there are two electronic quotation platforms in France: MTS France for debt securities (public and non-public) POWERNEXT for electricity futures MTS France, which began trading in April 2000, was established for the purpose of trading Euro-denominated securities issued by the French government. The system is owned by 21 French government bond primary dealers, MTS S.p.A. and Euronext Paris SA. Currently, 23 institutions participate in the MTS France system Access To become a market member of Euronext Paris, intermediaries must fulfil two conditions: first, being duly authorised by the French regulatory authorities to offer investment services and, second, complying with Euronext admission rules 39. All the rules designed by Euronext Paris are subject to the approval by the regulatory authority, the Authorité des marchés financiers. 39 To set up a single pan-european stock exchange, Euronext is moving towards common rules across the various exchanges it owns, especially in the following areas: market member admission rules, listing rules and market rules. February

72 Section 12 France In their response to the questionnaire, French authorities have provided some information on the types of institutions that can be admitted to trading on the four French Euronext markets. These are: European investment firms and credit institutions Third country firms, subject to similar regulation provided a MOU has been agreed between the French and the third country supervisory authorities. We have reviewed the Euronext Rule Book governing the contractual relationship between Euronext exchanges and trading members. Under Requirements for Euronext Securities Membership 40, it is specified that: Each prospective Member must be, or irrevocably undertake to become, a Clearing Member, or alternatively, must have entered into a Clearing Agreement or hold an irrevocable written commitment of a Clearing Member to enter into such an agreement. A Clearing Member is defined as: Any Person authorised by the Clearing House to clear Transactions in accordance with the relevant provisions of the Clearing Rule Book. A Clearing House is defined as: Clearnet or London Clearing House, as the case may be. So, it appears that there is a contractual obligation imposed on Euronext Paris trading members to clear transactions with LCH.Clearnet SA in the case of securities transactions executed on Euronext Paris 41. Participants to MTS France must subscribe to both LCH.Clearnet SA (for clearing) and Euroclear France (for settlement) Clearing Prior to their merger in 1999, there were three clearinghouses in France: SBF for equity trades and options, MATIF SA for exchange-traded derivatives and BCC for repo and outright trades on government debt securities. Following the merger between the French, Belgian and Dutch clearing houses, Clearnet SA became, in February 2001, the sole clearing house and central counterparty for markets operated by Euronext 42. In June 2003, London Clearing House (LCH), UK s largest, member-owned, clearing house, and Clearnet SA announced their intention to merge to become LCH.Clearnet SA. 40 Euronext Rules, Book I Latest update 16 January The same contractual obligation to clear transactions with Clearnet SA is imposed on trading members of Euronext Amsterdam, Euronext Brussels and Euronext Lisbon. 42 In November 2003, Clearnet SA also became the sole clearer for the Lisbon cash market which joined Euronext in February

73 Section 12 France The merger was completed on 22 nd December Details of the agreement are provided in Section Products and markets In addition to providing clearing services for Euronext markets, LCH.Clearnet SA clears trades for other trading infrastructures such as MTS France Role as a central counterparty LCH.Clearnet SA acts as a central counterparty for securities traded on Euronext markets (four regulated markets mentioned above) and MTS France Access The following entities are eligible to become a Clearing Member: Credit institutions established in France; Investment firms established in France; Legal persons whose members or shareholders have unlimited joint and several liability for their debts and obligations, provided that such members or shareholders are institutions or firms mentioned under 1 or 2; Legal persons established in France and whose principal or sole object is the clearing of financial instruments; Credit institutions, investment firms and legal persons whose principal or sole object is the clearing of financial instruments, that are established outside France, under prior approval of the Authorité des marchés financiers. An agreement between the Authorité des marchés financiers and another Competent Authority may provide an exemption from prior authorisation for a category of entities. We have reviewed the Application for Admission as a Clearing Member of LCH.Clearnet SA 43. Section 5 dealing with delivery/settlement stipulates that all securities in one market will be delivered through a single settlement system. A prospective Clearing Member of the Paris Euronext markets has the choice between Euroclear France and Euroclear Bank (LCH.Clearnet SA has a direct feed to Euroclear). So, it appears that there is a contractual obligation for LCH.Clearnet SA members to use either one of the two French Euronext s partner settlement organisations Euroclear France or Euroclear Bank. 43 Clearnet Application for Admission as a Clearing Member, Updated 29th July February

74 Section 12 France 12.3 Settlement There are currently two settlement organisations active in France: Euroclear France and Euroclear Bank, both belonging to the Euroclear group. Euroclear France SA is the CSD of France and the operator of so-called Relit+ and RGV settlement systems. Euroclear Bank SA/NV is based in Brussels and performs the ICSD role and provides a single access point to securities services in over 25 equity markets and over 30 bond markets worldwide Proposed restructuring of Euroclear On 10th October, 2003, the Board of Euroclear plc announced its intention to restructure the Euroclear group. The new structure will be subject to review by regulatory authorities. A decision of the Board of Euroclear is expected in early 2004 and implementation of the restructuring is targeted for year-end 2004, subject to appropriate approvals and consents. According to Euroclear s press release, the main thrust of the Board s intended corporate structure consists of forming a new company, to be called Euroclear SA/NV. Incorporated in Belgium, the new company would own and operate the Single Settlement Engine, and more generally, provide shared services to all Euroclear group entities. It is also proposed that Euroclear Bank, the ICSD, and each of the national CSDs: CRESTCo, Euroclear France and Euroclear Netherlands would become sister subsidiaries of Euroclear SA/NV. Clients would continue to access Euroclear services through Euroclear Bank and the CSDs, rather than through the new company, as this new company would only provide services to the other Euroclear group entities, not to clients. Euroclear hopes that the new structure would ally concerns expressed by competitors, such as the Fair & Clear group 44, who claim that Euroclear competes unfairly in the settlement business by using revenues from its central depositories to subsidise its banking business, allowing it to offer settlement services at heavily discounted rates. The new structure would also provide a more formalised transparency on the cost allocations relating to the Single Settlement Engine and other shared services across the various CSDs and the ICSD of the Euroclear group. Euroclear also undertook to promote transparency, with respect to intercompany cost allocations and avoidance of any cross-subsidy, by committing to commission an annual independent auditor report on Euroclear s compliance with OECD transfer-pricing principles relating to cost allocations 44 The Fair and Clear Group comprises a number of agent banks, such as BNP Paribas Securities, Citibank, Kas Bank and Den norske Bank. It was formed about two years ago amid concerns over Euroclear s expansion into the cross-border equities settlement business through the acquisition of first of the French, then the UK, Belgian, Dutch and Portuguese depositories February

75 Section 12 France and attesting that Euroclear group entities are applying these principles in all material aspects Products and markets Euroclear France is the French domestic CSD. In 2002, its links to local markets for foreign securities were rationalised, complementing the development of a direct feed from Euronext Paris to Euroclear Bank, which delivered a choice of settlement locations to all users of Euronext Paris. Thus, customers are able to chose between: A Domestic Service package that brings together the services already provided under French law by Euroclear France. This domestic service includes all usual functions (such as transfer and safekeeping as well as access to central bank payments); Alternatively, customers can subscribe to a Full Service package offered under Belgium law by Euroclear Bank, providing a single point of access, not only to the domestic securities market but also to Eurobonds and securities from around thirty additional markets. Customers can choose between settlement in central bank money or in commercial bank funds. According to Euroclear, current Euroclear France customers do not need to use the services of Euroclear Bank unless they choose to do so. The decision to opt for either the Domestic Service or the Full Service or a combination of both is entirely for customers. Euroclear has indicated that there will be no cross-subsidy between the Domestic Service and the Full Service Access 46 Euroclear France The institutions listed below can become members of the Central Securities Depositary (CSD) and participants of the RGV2 clearing and settlement system operated by Euroclear France. Credit institutions in the sense of article L of the 'Code monétaire et financier', which provide the investment services mentioned in articles L and L of said code. Investment companies in the sense of article L of the 'Code monétaire et financier'. Legal entities, mentioned in article L of the 'Code monétaire et financier'. 45 To our knowledge, no other settlement service provider produces such an independent report. 46 From February

76 Section 12 France Legal entities and nationals of the European Economic Area who are authorised to provide investment services and related services in mainland France and the overseas departments pursuant to the terms of article L of the 'Code monétaire et financier'. Companies or legal entities, mentioned in paragraph 2 of article L of the general regulations of Euroclear France's supervisory authority, the Authorité des marchés financiers. Institutions mentioned in article L of the 'Code monétaire et financier'. Legal entities that issue the financial instruments concerned by article L of the 'Code monétaire et financier' and that have admission to Euroclear France operations. French financial instrument central depositories approved by the Authorité des marchés financiers. Foreign central depositories all other French or foreign institutions, irrespective of whether they are members of the European Economic Area, the activities of which include those of the above-mentioned institutions. Euroclear Bank To become a client of Euroclear Bank the conditions described below must be met. Financial resources: an applicant must demonstrate its ability to maintain adequate financial strength to support the use of Euroclear Bank's services. Technical capability: an applicant must demonstrate it has both the staff and the technological infrastructure to meet Euroclear Bank's operational requirements for the applicant's intended use. Need for Euroclear Bank's services: an applicant must show that it expects to derive material benefit from direct access to Euroclear Bank and to generate a sufficient volume of depot or transactions to justify admission. Reputation in the market: an applicant must have a good name in the market; regulatory status may be taken into account when evaluating an applicant's reputation. In addition, an applicant must have an anti-money-laundering programme in place designed to comply with local law on the prevention and detection of money laundering, and to provide sufficient identification, control and reporting procedures Exclusive arrangements According to French authorities response, the French legislation does not impose any exclusive arrangement in the area of clearing and settlement. Our review of French legislation supports this conclusion. However, our February

77 Section 12 France review of Euronext Rule Book and LCH.Clearnet Application for Admission as a Clearing Member suggests that there are a number of exclusive arrangements for both clearing and settlement arising from the contractual obligations set out in these documents. First, Euronext Rules Book require trading members to clear transactions with Euronext-controlled LCH.Clearnet SA. Second, access to clearing services provided by LCH.Clearnet SA appears to be conditional on using settlement services provided by Euronext s partner Euroclear. While users may have the choice between Euroclear Bank, the ICSD, and Euroclear France, depending on the type of settlement services they seek, the choice appears to be limited to entities that are part of the Euroclear group of companies. We have not discussed these matters with Euronext, LCH.Clearnet SA or Euroclear and are not in a position to indicate whether there is any flexibility for a prospective trading or clearing member who would be interested in either clearing or settling with an organisation that is not part of the Euronext/Euroclear group of companies. February

78 Section 12 France Table 11: Overview of exclusive arrangement in clearing and settlement Trading Regulated Markets Marché Libre OTC MTS France Paris Bourse Nouveau Marché Clearing LCH.Clearnet SA LCH.Clearnet SA LCH.Clearnet SA (1) CCP Yes Yes Yes Settlement Euroclear France or Euroclear Bank Euroclear France or Euroclear Bank Euroclear France NOTE: (1) When securities are deposited with Euroclear France Figure 11: France securities systems trade clearing Euronext Paris: Paris Bourse; Nouveau Marche; MONEP; MATIF Clearnet Electronic Market: MTFS France settlement Euroclear February

79 Section 13 Germany 13 Germany 13.1 Trading Exchanges Equities Table 12: Overview of German equities markets Exchanges Types of securities Operated by The Frankfurt Stock Exchange The Berlin Stock Market The Bremen Stock Market All types of securities All types of securities All types of securities Deutsche Börse AG Berliner Börse (merged in 2003) The Düsseldorf Stock Market All types of securities Börse Düsseldorf The Hamburg Hanseatic Stock Market The Lower Saxony Stock Market at Hanover All types of securities All types of securities BÖAG Börsen AG BOAG Börsen AG The Bavarian Stock Market All types of securities Bayrische Börse AG The Baden-Wurttemberg Stock Exchange All types of securities Börse Stuttgart AG Source: Federal Cartel Office response to questionnaire. Bonds Launched in October 2000, Eurex Bonds GmbH is an Electronic Communication Network that provides participants with an electronic platform for off-exchange, wholesale trading in fixed income bonds. Eurex Bonds GmbH is a private law joint venture between Eurex Frankfurt AG and a number of leading financial institutions. By having networked the Euro Bonds trading platform into the Eurex Clearing settlement system, the Eurex clearing house acts as a central counterparty for all bond trades. The current product range includes over 120 different instruments available for trading: German government bonds, basis instruments, Sub-Sovereigns and Jumbo Pfandbrief issues (mortgagebacked securities). There are currently 26 participants active on Eurex Bonds. February

80 Section 13 Germany The MTS German Market is a division of EuroMTS. It manages the electronic trading platform for German government bonds and high quality quasigovernment bonds issued by German issuers. Trading on the MTS German Market is conducted via the Telematico system. All major international financial institutions participate in the MTS German Market Access There are two key German laws relevant for access to trading in German stock exchanges: the German Stock Market Act and the Safe Custody Act. The German stock market legislation (Gesetz zur weiteren Fortentwicklung des Finanzplatzes Deutschland, Artikel 1, Börsengesetz) provides that admission to trading on stock markets may be granted if the proper conduct of business on the stock exchange floor is guaranteed. All seven German stock exchanges that trade equities have incorporated this provision into their stock market rules and spelled out how this condition is met in their own market 47. As explained below, since March 2003, this condition is met at the Frankfurt Stock Exchange if clearing of share transactions listed on the electronic trading system takes place with Eurex Clearing AG and settlement of these transactions takes place with Clearstream Banking AG. For transactions that do not involve equities listed on the electronic trading system of the Frankfurt Stock Exchange and for equity transactions on the other six German stock exchanges, this condition is met if clearing and settlement take place with Clearstream Banking AG. The Safe Custody Act (Depositgesets) requires that securities subject to collective safe custody must be held in a Wertpapiersammelbank (central depository for securities). The Minister of Finance, in agreement with the Minister of Justice, designates by regulation which credit institution can act as a central depositor for securities. The Minister of Finance makes the determination on the basis of recommendations made by the stock exchanges, taking into account both the experience and the capacity of the applicant to undertake the activities of a central depositor for securities. Clearstream Banking AG is currently the only institution licensed as a central depository for securities in Germany. In theory, another credit institution could apply to become a central depository for securities. Access to the Frankfurt Stock Exchange According to section 16 of Exchange Rules for the Frankfurt Stock Exchange (FWB1e, July 1, 2003): (1) The admission of an enterprise to participate in Exchange trading pursuant to section 15 is to be granted if: 47 Stock market rules are subject to approval by the respective State stock market supervisory authority. February

81 Section 13 Germany 2. the orderly settlement of transactions at the Exchange is assured. (2) The condition contained in paragraph (1) No. 2 is assured if the applicant conducts the settlement of its Exchange transactions through Clearstream Banking AG and a state central bank (Landeszentralbank). In the case of securities held on a fiduciary basis, settlement of transactions will be conducted through Clearstream Banking AG alone to the extent that Clearstream ensures the settlement of cash clearing and securities clearing. It is necessary in addition thereto, for the orderly settlement of transactions that have as their object securities quoted in foreign currencies or units of account, that the participant itself participates in clearing in foreign currencies or units of accounts or maintains an account relationship with an appropriate clearing bank; participants and clearing banks identified above must participate in the clearing process of Clearstream Banking AG for securities to be settled in foreign currencies or units of accounts. According to Section 16(a) of the Exchange Rules for the Frankfurt Stock Exchange: (1) Notwithstanding the provisions of section 16 paragraph (1) No. 2 and 16 paragraph (2), the applicant shall for the purpose of satisfying its liabilities arising out of transactions in German shares held in collective deposit which are tradable in the electronic trading system of the Frankfurt Stock Exchange, ensure the settlement 48 thereof via Eurex Clearing AG. The applicant shall be required to provide evidence of the acceptance of Clearing Conditions for Eurex Clearing AG. As described above, at the present time, Eurex Clearing AG and Clearstream Banking AG are the clearing and settlement organisations that have to be used for securities trades executed on the Frankfurt Stock Exchange. However, it should be noted that in recently the Deutsche Börse has changed its rules to open up share settlement to competition 49. Access to other German stock exchanges The requirement relating to settlement with Clearstream Banking AG is also found in rules of the other 6 German stock exchanges, although the wording is slightly different from that found in the Exchange Rules of the Frankfurt Stock Exchange. The Federal Cartel Office has suggested that there was 48 In this document, we have reproduced the English version of the Exchange Rules for the Frankfurt Stock Exchange. In our view, the English version of this particular sentence does not accurately reflect the intent of the German version. A better way to express the obligation would be to say that: the applicant shall for the purpose of satisfying its liabilities arising out of transactions in German shares held in collective deposit which are tradable in the electronic trading system of the Frankfurt Stock Exchange, ensure that the transaction is routed through Eurex Clearing AG. Our analysis is based on the following German version: Unbeschadet der Vorschriften des 16 Absatz 1 Ziff. 2 und des 16 Absatz 2 hat der Antragsteller zur Erfüllung seiner Verbindlichkeiten aus Geschäften in girosammelverwahrten deutschen Aktien, die im elektronischen Handelssystem der Frankfurter Wertpapierbörse handelbar sind, eine Abwicklung über die Eurex Clearing AG zu gewährleisten. Er hat hierzu eine Anerkennung der Clearing-Bedingungen der Eurex Clearing AG nachzuweisen. 49 Financial Times, Deutsche Börse softens its stance, 3 March February

82 Section 13 Germany additional flexibility in the case of the Berlin-Bremen stock exchange. According to the Exchange Rules of the Berlin-Bremen, the legislative requirement that the proper conduct of business on the stock exchange floor be guaranteed, can be met in particular if the applicant concludes his stock market deals via Clearstream Banking AG and a state central bank. The Federal Cartel Office is suggesting that, by inserting the words in particular, the Berlin-Bremen stock exchange contemplates the possibility of admission to trading without concluding stock market deals via Clearstream Banking AG. Considering that Clearstream Banking AG is the only recognized central depository for securities, this potential additional flexibility provided by the Berlin-Bremem exchange may not mean much in practice. None of the other 5 stock exchanges have incorporated this additional flexibility in their access rules. Access to Eurex Bonds According to Eurex Bonds, Terms and Conditions for Participation and Trading on Eurex Bonds (updated 15 October 2003) the enterprise must: Have: i) a Eurex Bonds Clearing License of Eurex Clearing AG (as a General Clearing Member or a Direct Clearing Member) or ii) an agreement as a non-clearing member with an institution which has a clearing license of Eurex Clearing AG. Be a credit institution or an investment firm within the meaning of Article 1 of Council Directive 93/22/EEC. Demonstrate liable equity capital of 100 million euros for the respective group or of active trading in German government bonds of at least 50 billion euros within the previous 12 months or be a member of the Bund Issues Auction Group (Bietergruppe Bundesemission) or of a comparable national group of primary dealers. Have access to the technical infrastructure of the electronic trading system of Eurex bonds Clearing There are two clearing organisations in Germany: Eurex Clearing AG and Clearstream Banking AG In its response to the questionnaire, the Federal Cartel Office has indicated it is not possible to list all the institutions and companies that perform clearing and settlement, since there is no obligation in this regard for companies operating in this business area to register. Since the Federal Cartel Office response to the questionnaire also clearly indicates that only Eurex Clearing AG and Clearstream Banking AG are involved in clearing of equities and bonds, we interpret this statement as meaning that other potential clearing organisations are involved in other markets (e.g. commodities). February

83 Section 13 Germany Eurex Clearing AG Corporate structure Eurex Clearing AG is a wholly-owned subsidiary of Eurex Frankfurt AG, founded in 1998 under German law and registered in Frankfurt/Main. Eurex Frankfurt AG is owned half by Deutsche Börse AG and half by the Swiss Exchange. Products and markets Eurex Clearing AG has had the responsibility for the clearing of derivatives and all spot transactions executed on the Eurex Bonds since October 2000 and the responsibility for the clearing of equities listed on the electronic system (Xetra) of the Frankfurt Stock Exchange since March The following table provides information on the types of clearing licenses and cleared and settled products (see also diagram provided in annex). Table 13: Eurex Clearing AG Clearing Activities Clearing Licenses Equity Clearing License Bonds Clearing License Derivatives Clearing License Repo Clearing License Cleared and settled products Shares held in collective safe custody that are traded on the floor or via Xetra of Frankfurt Stock Exchange Fixed-rates bonds of the Federal Republic of Germany or the TreuhandanstaltJumbo Pfandbriefe of German issuers. Issues of the Kreditanstalt fur Wiederaufbau (Reconstruction Loan Corporation), the European Investment Bank and the German LanderSecurities leg of basis trades (1) Futures and options products traded at Eurex ExchangesFutures leg of basis trades (1) General Collateral and Special Repo with: Fixed-rate bonds of the Federal Republic of Germany or the TreuhandanstaltJumbo Pfandbriefe of German issuers Bonds issued by Kreditanstalt fur Wiederaufbau (Reconstruction Loan Corporation) and German States Bonds NOTE: (1) The basis trade is a combination of a security and futures contract, which has a price of its own. The purchase of a basis trade implies the purchase of a certain amount of securities and the simultaneous sale of the corresponding amount of futures contracts. Source: February

84 Section 13 Germany Role as central counterparty Eurex Clearing AG is the central counterparty for bonds traded on Eurex Bonds GmbH (since October 2000) and for on-exchange trades executed on either Xetra or the floor of the Frankfurt Stock Exchange in equities that are subject to collective safe custody, denominated in euro and listed on Xetra (since March 2003) 51. It is not clear why the other stock exchanges have not migrated to a central counterparty arrangement or whether they intend to do so in the future. Figure 12: Eurex Clearing AG Market Participants Frankfurter Westpapierborse (Equities) Eurex- Exchanges (Futures & Options) Eurex Bonds GmbH Eurex Repo GmbH Further markets and trading systems EUREX CLEARING AG National Central Securities Depositories International Central Securities Depositories Access Admission to direct participation in the clearing process can take place in the form of: General Clearing Membership (GCM) Direct Clearing Membership (DCM) The difference between these memberships is their role in the clearing process. 51 Eurex Deutschland, Eurex Zurich AG and Eurex Repo GmbH are other entities in the Deutsche Börse group that offer central counterparty services for derivatives and repos. February

85 Section 13 Germany Companies may become exchange participants without having a clearing status (i.e. Non Clearing Members NCMs). Non Clearing Members must conclude a clearing agreement with either a General Clearing Member or a group-affiliated General Clearing Member. Participation as a GCM or a DCM requires issuance of the appropriate license, for which the following requirements in particular must be fulfilled: Any institution domiciled in a country of the European Union or Switzerland with the license to conduct safe custody business, lending operations and the receipt of collateral in the form of cash or securities. Sufficient liable equity capital in the given local currency as per the provision of applicable laws. Granting of a clearing guarantee issued by a third-party bank. The amount of the contribution provided shall be determined by Eurex Clearing AG for each Clearing Member. Maintenance of current accounts with the central bank or other fund clearing institutions stipulated by Eurex Clearing AG, as well as securities accounts at those central custodian organisations designated by Eurex Clearing AG. Necessary technical installations and personnel required for backoffice clearing operations. As noted above, clearing members may be admitted as General Clearing Members or Direct Clearing Members. General Clearing Members are authorised to clear their own transactions as well as those of their customers and those of Non Clearing Members clearing through them. Direct Clearing Members are entitled to carry out the clearing for their own transactions, those of their customers and of affiliated Non Clearing Members. Non Clearing Members may enter into agreements with different Clearing Members on a per-trading-platform basis (e.g. Eurex Bonds GmbH, Eurex Exchanges). However, the trades executed on a specific trading platform may only be cleared and settled by a single Clearing Member. That does not diminish the fact, though, that trades can be given up to other participants via the give-up/take-up functionality. Because Non Clearing Members have no contractual relationship with Eurex Clearing AG, transactions are essentially concluded between Eurex Clearing AG and a given Clearing Member, and in turn between that Clearing Member and the specific NCM. Also, fee payments and margin deposits are made to the clearing house via the contractually stipulated Clearing Member. As of March 2003, there were 420 Eurex members based in 18 countries. Indirect access can take the form of traditional brokerage services as well as automated order routing. February

86 Section 13 Germany Clearstream Banking AG Corporate structure Clearstream International was formed in January 2000 through the merger of Cedel International and Deutsche Börse Clearing. Clearstream International fully owns Clearstream Banking AG, itself the result of the amalgamation of eight regional clearing houses associations. The full integration of Clearstream was completed in July 2002 when it became a wholly owned subsidiary of Deutsche Börse Settlement Clearstream Banking AG Clearstream Banking AG is the main provider of central securities depository services to the German domestic market because, as discussed earlier, of its exclusive role for collective safe custody. Products and Services On 17 November 2003, a new settlement model for the German domestic market (collective safe custody only) was delivered by Clearstream Banking AG. The new settlement model contains a guarantee concept that facilitates cross-border transactions. Participants provide liquidity to the German market through deposits (either cash or securities) at their central national bank which, in turn, provides a cross-border guarantee to the Bundesbank. This guarantee concept contributes to level the playing field by providing access to central bank money for both domestic and foreign participants in cross-border transactions. The new settlement model is being implemented on the CASCADE platform (itself developed to meet the requirements of the German domestic market). The model changes the method used in cash clearing and is intended to improve the reliability and efficiency of securities settlement. The new model being implemented by Clearstream is a so-called True-DvP using central bank liquidity. The new model addresses the requirements of institutions (European Central Bank and CPSS/IOSCO) as well as market organisations to eliminate potential unwinding risks in securities settlement. The new settlement process is introduced initially for standard processing (i.e. for transactions included in overnight processing). According to Clearstream Banking AG and the Bundesbank, the next steps will be to extend the model to daytime processing and to forge new connections with other central banks. Clearstream Banking AG also provides settlement services for transactions executed on other trading platforms. For example, in mid-october, Clearstream Banking AG announced the launching of new February

87 Section 13 Germany settlement routes with BrokerTec and MTS Germany, as well as enhancement of the link to SIS regarding SWX-Pfandbriefe (Swiss Exchange). Access Clearing members of Eurex Clearing AG can stipulate a separate settlement institution for the settlement of transactions. Prerequisites for settlement are an account at the Bundesbank and/or Swiss National Bank or correspondent banks approved by Eurex Clearing AG and a securities account at one central depository or custodian bank recognised by Eurex Clearing AG. Holders of equity clearing license (i.e. exchange participants with a clearing status -- whether they are executing their own transactions or those of non-clearing members with whom they have a clearing agreement) must settle with Clearstream Banking in its function as Wertpapiersmmelbank, the central securities depository. As noted earlier, at present, Clearstream Banking AG is the only authorised Wertpapiersmmelbank in Germany, allowing it to hold securities in collective safe custody and to keep them physically in its own vaults. According to German authorities, this does not constitute an exclusive arrangement because other financial institutions could apply to become a Wertpapiersmmelbank as well, in accordance with the provisions of the German Safe Custody Act (Depotgesetz). While there is legislative flexibility, there is de facto no alternative supplier of equity settlement services in Germany at the present time. The situation is somewhat different with respect to the settlement of bond transactions. According to Eurex Clearing AG, holders of bonds clearing license have the choice of settling their transactions with Clearstream Banking AG and/or Euroclear. Settlement of trades in MTS German Market is conducted either via Euroclear or Clearstream Banking AG. February

88 Section 13 Germany Figure 13: Clearstream Corporate Structure Deutsche Börse AG Frankfurt Cedel International Luxembourg Clearstream International Luxembourg Clearstream Banking Luxembourg Clearstream Banking Frankfurt Clearstream Services Luxembourg LuxClear Clearstream International UK Branch Clearstream Properties Luxembourg Clearstream Services (UK) Source: Clearstream Banking Luxembourg, Customer Handbook, June Exclusive arrangements Table 14 below summarises securities clearing and settlement arrangements in Germany since March 2003 and the introduction of the central counterparty services. It shows that most clearing and settlement activities relating to equity and bond trading in Germany appear to be bound by exclusive arrangements. These exclusive arrangements take their origin in obligations to clear and settle with certain organisations in order to be allowed to trade in a given market. As discussed earlier, these obligations are imposed through various vehicles: legislation, regulation and/or contractual arrangement for equities and contractual arrangement between infrastructure providers and market participants for bonds. However, it should be noted that the Deutsche Börse has recently changed its rules to open up share settlement to competition. February

89 Section 13 Germany Table 14: Overview of clearing and settlement arrangements Equities Bonds Trading Frankfurt Stock Exchange Listed on Xetra Others Other German stock exchanges (for equities) Eurex Bonds GmbH MTS Germany Clearing Eurex Clearing AG Clearstream BankingAG Clearstream Banking AG Eurex Clearing AG Clearstream Banking AG CCP Yes No No Yes No Settlement Clearstream Banking AG Clearstream Banking AG Clearstream Banking AG; or Euroclear Figure 14: Deutsche Börse Group holdings Source: Deutsche Börse website: ns/10_the_company/20_organizational_structure February