BOLSAS Y MERCADOS ESPAÑOLES

Transcription

1 BOLSAS Y MERCADOS ESPAÑOLES Comments on the Communication to the Council and the European Parliament Clearing and settlement in the European Union The way forward Version 6

2 July

3 1. Introduction We welcome the work carried out by the European Commission in order to prepare this Communication (hereinafter referred to as the Communication ) and would also like to express our gratitude and appreciation for the opportunity to express our opinion and comments on matters concerning our sector. Bolsas y Mercados Españoles (BME) is one of the most relevant groups of financial markets and systems in Europe. Through its different business areas (equity, fixed income, derivatives, clearing and settlement, dissemination of information, technological solutions and services) BME offers the financial community an extensive and diversified range of products and services concerning the Spanish securities market. 2. Current situation The Communication approaches the existing situation by describing the available channels for clearing and settling of securities and/or derivative transactions. If there is one word which can sum-up the current European clearing and settlement landscape, it would be diversity. We, in Europe, can distinguish between, in addition to Custodians, the following providers of CSD activities : A). CSDs that we can define as Traditional CSDs i.e. CSDs which are a dedicated private company, which manage a specific financing public service and have a very limited operational scope (i.e. limited to basic register, clearing and settlement services). The Traditional CSDs are heavily regulated and supervised by national authorities, are price controlled, and not allowed to bear credit risks as principals, and are usually owned by its national participants. B). CSDs very similar to the abovementioned Traditional CSDs but with the status of credit institution. However, the banking status is only limited to grant credit on the grounds that their participants are experiencing settlement difficulties. C). The so-called ICSDs which are banks. After the creation of the euro, the ICSDs have purchased CSDs as described in points a & b, and integrated them into their groups either vertically or horizontally. In 3

4 addition to the national services that their CSDs offer, the ICSDs provide cross-border custody and settlement services. As such, they directly compete against the participants in their systems. Though it refers separately to Central Securities Depositories and to International Central Securities Depositories as different entities (i.e. in page 5), the Communication does not take into account the substantial differences existing between each class of such Depositories. In fact, the Communication tends to describe both kind of Depositories just as if they were alternative channels providing the very same services and subject to a similar regulatory framework. However, the current situation does not fit with such representation. The important work carried out by the ESCB/CESR Working Group, that has identified common standards for entities providing clearing and settlement activities in the EU, clearly highlights that point. The standard 6 recalls that CSDs are the exclusive place for: a. The role of ultimate settlement agent for their participants. b. The entities in charge of recording the amount of each issue held in the system, in a specific account and in the name of the issuer, controlling the exact identity of securities issued by the issuer and securities held by investors. c. The institutions in charge of guaranteeing the function of their systems, mitigating operational and systemic risks in such a way that CSDs are the basic infrastructure that assures the correct functioning of the clearing and settlement system in any event, even if the CSD becomes insolvent. Retaining then the very different status of CSDs and ICSDs, some comments can be made about the disparities between the performance of clearing and settlement activities concerning national transactions and cross-border transactions, respectively. Figures show than the cross-border settlement carried out by CSDs (i.e. excluding ICSDs) is insignificant. In particular, only a 0.03% of Spanish equities owned by nonresident investors are recorded through the channel of foreign CSDs Iberclear links (June 2004 figures). The main reason for this is the lack of DvP links between CSDs. As a result, institutions refuse to use existing FoP links due to the inherent principal risk associated with them. Therefore, in practice cross-border settlement is carried out exclusively by custodians. If it is concluded that current cross-border settlement is inefficient, costly and 4

5 cumbersome, then efforts should be then focused on the Custodian channel, which, in reality, is the channel almost exclusive used. In contrast, domestic settlement, carried out by Securities Settlement Systems, is widely recognised as efficient and cheap. However, the reason this channel is not so efficient in terms of cross-border transactions, and cannot compete with the custodian channel, in our opinion is due to the legal status that national regulations give to CSDs and to the functional restrictions they impose on them. For instance, CSDs are not permitted to manage cash accounts in the cross-border context and so facilitate their associated settlement, they cannot offer value-added services to their clients (mainly securities and money credits) and finally, are denied access to central bank financing. In relation to the European Parliament Resolution dated January 2003, it was then proposed to limit CSDs activities to those that only imply operational risks. This limitation would further decrease drastically the possibility for CSDs to take a relevant role in the cross-border settlement. As such, this proposal would consolidate the current status quo described in the former paragraphs. The functional separation of value-added services for those CSDs already allowed to offer them would, in fact, imply an obstacle to competition and to a more efficient and diversified development of the CSDs as a whole. The separation of CSD functions will impede any synergies gained from economies of scale made by the CSD s business such as cost reductions to users and participants. 3. The barriers identified by the Giovannini Reports The two Giovannini Reports are valuable contributions towards the complex task of integrating the Securities Settlement Systems. The timetable and allocation of responsibilities in order to overcome the 15 identified barriers signal, and graduate clearly, the level of importance and difficulty associated with the above mentioned barriers. In our opinion, the main difficulty is the diversity among national company laws and the lack of EU harmonisation relating to the legal treatment of marketable securities, their transmission and deposit. Undoubtedly, the harmonisation of proprietary rights is a tremendous task which is only achievable in the long term. As a result, the step by step approach proposed by Giovannini is both pragmatic and intelligent. As a result, the legal component is a crucial and determinant element in CSD activity. In most other countries, the so-called market practices fulfil, or stem from, national regulations or laws. The national Securities Settlement Systems were created precisely to comply with national legislation. This is why they are efficient at national level. 5

6 As a consequence, we believe the main obstacle to overcome in order to foster crossborder transactions stems from the fact that, behind every transaction of that sort, there are two different applicable national jurisdictions. We do not believe the main obstacles to be technical or operative access difficulties or a proper knowledge of the foreign settlement platform and its practices and rules. As far as different legislation is concerned, the EU has a wide range of national peculiarities and differences: a. Systems which are fully dematerialised. b. Systems in which there are physical securities that are immobilised. c. Systems which are mixed where there are book-entry records and physical deliveries. Also, these wide differences challenge even the meaning of the securities representation generally accepted in the EU i.e. book-entry. In some countries the term own record represents the security whereas in others it is a claim or interest of security. To sum up, most of Giovannini barriers will only be overcome once an EU common jurisdictional framework has been put into place. Nevertheless, we appreciate the Giovannini Reports as a valuable tool towards overcoming the differences step by step and pragmatically. 4. Common regulatory/supervisory framework We share the Commission s view about the importance of the regulatory and supervisory issues for clearing and settlement in Europe and on the relevant role of a common framework in those areas as a prerequisite for the establishment of a level playing field between EU clearing and settlement service providers. A very crucial point in such a common legislative and regulatory framework refers to securities ownership registration. It is worth mentioning that here we are thinking of the basic principle established in the Communication concerning the protection of the clients securities. The way this registration takes place and how it effects the change of ownership will influence decisively the clearing and settlement of the securities transactions. It is important to retain that protection in strict systems, as far as registration details are concerned, cannot be considered, at least in principle, a barrier to entry, given that they must be considered a safeguard for final beneficial owners. The Communication explicitly mentions works undertaken by current Joint Working Group from CESR and ECB in which the EU Commission is also represented. Its 6

7 results represent a valuable contribution for the creation of public and widely shared standards. In order to gain the most advantage from that contribution, special attention must be paid to the fact, rightly recognised in the Communication, that the standards proposed by this Working Group will not be mandatory, so their usefulness need to be judged as to how they will be reflected in European and national regulations. There is another similar issue insufficiently tackled by the Communication, which is the eventual relationships between such a Joint Working Group and the other groups, either set up by the European Commission or asked by the latter to collaborate in order to create new European legislation and/or the development of the existing legislation. It is necessary to define clearly the relationships between the different groups. Taking into account all the pending work in developing or amending financial European regulation and the requirements imposed by the Lamfalussy methodology; an organised and adequately defined way of working is of the utmost importance, especially when thinking about a proper definition of Levels II and III of the mentioned regulatory new methodology. 5. Absence of a common level playing field Having already mentioned (section 2) the very diverse players that coexist in the European clearing and settlement arena, the first thing that must be said concerning a common level playing field is that it should take into account the different functions that those players perform, especially regarding Traditional CSDs where some of their current operative limitation stems from their own legal status as defined by their national regulations. Therefore, the first issue in order to achieve a level playing field is to eventually reconsider the affected national regulations and provisions of Traditional CSDs so that they compete fairly with the other service providers. The Communication also cites that the lack of a level playing field stems from the different capital requirements that service providers currently have. Banks (including CSDs and ICSDs which are credit institutions) must fulfil the capital adequacy directive following the Basle I paper and shortly Basle II. According to this approach, it is suggested that Traditional CSDs are currently in a better situation to compete given that they are not obliged to fulfil capital requirements. We find that such a simple approach does not reflect the different situation where CSDs and ICSDs are placed. A Traditional CSD that is not allowed to take risks other than the operative risks must not be forced to maintain financial resources similar to those CSDs which are banks, for two reasons: Firstly, because capital requirements are in relation to the risks taken, and secondly, because if Traditional CSDs had excessive capital requirements, their own viability as a company would be at stake. 7

8 This is why we favour a much more detailed and casuistic view. More specifically, capital requirements for CSDs can be established provided that they clearly define the real risks that every provider must bear. Furthermore, if Traditional CSDs are forced to fulfil similar capital requirements to those of credit institutions, then they should be allowed to provide similar services and activities. If not, Traditional CSDs will be unfairly penalized as they have to comply with banking capital requirements but their services would still be limited to those of a mere infrastructure and technical service provider. 6. The liberalisation and competition policy An additional point we would like to make, concerning the level playing field, focuses on the different types of access that service providers have to investors. The Communication mentions on page 8 that liberalised and integrated securities clearing and settlement systems in the EU will require that all different options for cross-border clearing and settlement are available to markets, Clearing and Settlement service providers and investors. It is only when they enjoy full choice on how to clear and settle cross-border transactions that competition will be fully at work and able to generate positive effects in terms of price reduction and economy efficiency. However, service providers have different channels to access investors, or put differently, neither service providers nor investors are given a full choice to choose how to settle cross-border transactions, due to the fact that Custodians can access the final investor (the beneficial owner) in order to set up client-provider relationships, whereas most CSDs are unable to access these investors as their regulations prevent them from competing against their own participants. It is clear that CSDs cannot compete for private retail investors. CSDs do not offer universal banking services like Custodians offer their investors. Having said that, any liberalisation and competition policy must take into account those national regulatory constraints regarding the kind of services and activities that CSDs may provide and the way they are obliged to follow. 7. The integration and liberalisation of securities settlement systems The Communication combines two very different concepts, that of liberalisation and integration. The first clearly points to freedom to access and to operate in several securities clearing and settlement systems. On the contrary, integration of such systems is a much more open concept. Once defined (page 8), the Communication seems to also refer to it as consolidation (page 11), which suggests a sort of institutional and organic unification among clearing and settlement systems. Nevertheless, the Communication rightly understands that the process of 8

9 consolidation needs to be market-led, making clear that the European Commission does not intend to define which should be the trend or the result of such process. Those considerations lead us to suggest that the emphasis must be put upon the liberalisation and the efficient access and operation of the securities settlement systems, avoiding a too vague and undefined reference to integration. As we mentioned before, Europe experiences a wide range of differences between systems and regulations. There are those systems that currently are laxer than other strict systems, for example, in important areas such as: investor protection, transparency, access to supervisor authorities, the registration details of the final investor etc., and can easily attract investors searching to bypass the above mentioned obligations. As a result, there are those systems that are less demanding with segregation accounts (own portfolio and clients portfolio), registration details of the final investor (beneficial owner) or cooperation with supervisory or tax authorities, which would benefit from those stricter systems. It is logical then to believe that systems based on omnibus accounts and on the nominee concept, where the movement on securities accounts only respond to simple securities transfers without any reference to the original market in which the transaction was agreed, will attract supranational participants or those investor seeking obscurity in holdings and transactions. Systems more exigent will be emptied of transactions if they are obliged to open links with those laxer systems. Similar rationale could be applied to links between systems that have markedly different services. Those systems allowed to offer value added services will drain the systems of the Traditional CSDs who are unable to compete. In any event, it is of the utmost importance that the interoperability and open access between CSDs does not lead to a legal top-down harmonisation, i.e. so reducing more strict legal requirements currently in place in certain systems, but, on the contrary, it should be considered as a way of seizing the legal richness of the different European jurisdictions. Also in relation to links, it is important to clarify the issue of eliminating the technical differences and market practices. As we have mentioned earlier, in a regulatory context so diverse as the EU landscape, it is important to differentiate between real barriers to entry and the requirements and conditions imposed by the national regulations aiming to protect investors. 8. The functional approach 9

10 As already stated, we agree with the Communication where it seeks measures aiming to liberalise the access to clearing and settlement activities and establishment of a common regulation and supervision framework. Both issues will encourage competition by reducing existing disparities. We also agree with the functional approach on the basis of clear definitions of clearing and settlement activities. We strongly recommend that this approach distinguishes between the register activity and the custodian activity. In our opinion, the Communication pays too little attention to this crucial activity for the proper, safe and secure finalisation of securities transactions and, more specifically, for the legal certainty of book-entry securities transactions. As mentioned in section 1 early, we consider that the CSD basic activities deserve distinctive treatment. We advocate in favour of recognising the uniqueness of some basic functions carried out by CSDs without contradicting the functional approach. As a result, we are in favour of an EU CSD status with the previous characteristics at its heart enabling it to recognise the role of basic infrastructure. This would therefore legally recognise and protect the exclusivity of CSDs for: a) Their relationship with issuers that record their securities in the issuer CSD system and the subsequently the Central Register associated with those records. b) Their notary functions carried out independently or in cooperation with participants (e.g. registrars). c) Their legal protection of securities balances recorded in their CSDs books, especially where third party clients are concerned. The former request does not lead to monopoly for core CSD services. In the near future, any Societas Europaea (under the European Company Statute, - Council Regulation 2157/2001) -, which was adopted on 8th October 2001 and will enter in to force on 8th October 2004) will be able to choose the legal regime in which to establish its headquarters or main office and therefore the jurisdiction that will apply to the issuance of their fixed-income or equities, in addition to the liberalisation of establishment of CSDs in any country. CSD competition for the registration activity is therefore guaranteed. As far as the other CSD activities are concerned, competition is open between CSDs, provided links exist. These linked CSDs could then be considered similar to other economic sectors, such as the linked train infrastructure or airports linked by routes in the transportation sector, or even the basic communication infrastructure in the telecommunication sector, etc The former exclusive CSD functions, in our opinion, are perfectly compatible with offering value added services (included granting securities loans and cash credits), 10

11 provided that the risks associated with those value added services will be clearly identified, adequately collateralised and guaranteed by capital requirements. We believe that there is no conflict of interests between participants especially those focused in the custodian business and CSDs, provided that there is a clear definition of activities available for each type of service provider. Overall, we do not believe it is necessary for a strict functional segregation of activities between clearing and settlement providers. Otherwise, we would be unable to gain synergies in this sector. Rigorous supervision by the competent authorities and adequate accounting principles will be able to identify the correct cost allocation by service providers. 9. The proposed framework Directive The Communication identifies a framework Lamfalussy Directive as one of the Commission s practical initiatives, coming from the assumption that this new Directive should face several issues not adequately solved in the existing European legislation, namely in the ISD and the ISD 2 (the Directive on Markets in Financial Instruments- MFID-). But, as far as rights of access and choice of securities clearing and settlement systems are concerned, what the Communication shows (pages 13 to 16) is that the MFID already tackles several relevant aspects, so it is not detecting the need of an entire new regulation but the need to complete some aspects of an issue already contemplated by European regulation. Given that situation, it must be pointed out that the elaboration of an entirely new Directive is a difficult process that, in any case, should pay preferential attention to a proper coordination with the MFID and to avoid any eventual discrepancy with this very important new Directive. This is why we suggest not to rule out the alternative possibility of including any eventual new needed European regulation in a new and separate Directive but as an amendment, eventually broad and extensive, of the MFID. This way of working would have the advantage of facilitating also the coordination among the different working groups and fora that take a relevant role while preparing Level II and III of any Lamfalussy regulation. 10. Governance 11

12 Generally speaking, tackling Corporate Governance issues should not be based on the supposedly great market power of Security Settlement Systems (SSS). There are several other sectors in which entities with singular and very important functions exist, and under EU Law they are not subject to specific Corporate Governance requirements (i.e. electric market operators and other utilities). Taking into account that these corporate governance requirements are, in nature, a limitation to the freedom to organise private entities, we would like to stress that these requisites should only be imposed as a mean, not as an end, and therefore only if there is a clear notion that they will contribute to solving real problems evident in practice. The Communication stresses that the measures it suggests concerning governance are in line with the policy orientations set forth in the Commission Communication on Company Law and Corporate Governance. But it must be remembered that this latter Communication is a very general document that it is not currently focused to prepare such a specific European regulation as a Lamfalussy Directive is. So it is difficult to perceive a clear parallelism between the Communication on Company Law and Corporate Governance and the Communication tackled in these comments. Due to the same reasons, we find that there is not yet a consensus about the corporate governance issues that could be included in a Lamfalussy Directive regarding clearing and settlement. Going into detail in that issue, a) The Communication does not clearly define whom the Corporate Governance requirements are going to be addressed to. ESCB-CESR standards are going to be applicable to entities managing systemically important systems. There should be consistency with regards to the entities that are required to comply with the obligations in both cases, especially if such standards will, in turn, become the Level 2 regulation of a framework Directive. b) Some Securities Settlement Systems are part of companies that are listed in regulated markets. In this form, they are already subject to strict corporate governance requirements. Any eventual additional regulation should not imply an overlapping of regulations and therefore of several bodies, committees, etc, with equal functions. c) The Communication considers that there are three reasons to promote corporate governance measures: i) to avoid risk, ii) to avoid anti-competitive practices, and iii) to avoid unreasonable pricing. It is important to differentiate between the issues that are more of a corporate nature (i.e. whether the salaries of Directors and executives are inadequate), which, according to recent viewpoints in the EU should be subject to transparency and, if not complied with, subject to the principle comply or explain. 12

13 d) In particular, with regards to disclosure of salary schemes, if the aim, as stated in the Communication, is to prevent management and directors from appropriating private benefits that belong to shareholders or that have an impact on pricing, then it can be clearly achieved by disclosing a clear structure of corporate and executive bodies, with their functions, together with aggregate figures of salaries and other benefits. More detailed information should be an option for each Securities Settlement System. e) Several references are made to independent directors. Additionally, the Communication clearly states that there are several different influences from which at least two types of directors should be independent. This unavoidably leads to the conclusion that it is of paramount importance that a clear and unambiguous definition of independent director (and the classes of these, if necessary) be available. f) Regarding the Audit Committee, it states that it should be made-up of a majority of independent directors, without having previously stated at all what the composition and structure of the Board of Directors of a Securities Settlement System should be. g) Relating to transparency of major decisions, it is very important to ensure that the subject matters that should be disclosed, as well as the process of disclosure (in particular, the moment from which disclosure becomes mandatory as well as by what means, i.e. a web page) be clearly and unambiguously stated. h) Communication of forecasts that include accounting issues, including cost allocation, will have to be the responsibility of an Audit Committee consisting of mainly independent directors. It is very important to distinguish the different responsibilities of the Audit Committee, as a supervisor of the company s financial team, from its responsibilities relating to the decisions on cost allocation, etc. Should these decisions be taken by the Audit Committee, then another independent committee would be needed to supervise the latter. Therefore, the scope of the Audit Committee s work should not enter into decisions that are the responsibility of the Board of Directors and High Executives. It should remain within the audit field. i) Concerning the obligation that qualified shareholders of Securities Clearing and Settlement Systems should meet the fitness and propriety requirements, and the suitability requirements respectively applicable to the management and the qualified shareholders of banks or investment firms, we consider that given the varied nature and circumstances of existing shareholder structure, a clear definition of qualified shareholder should be given. Additionally, and in order to 13

14 avoid proprietary law issues in national jurisdictions, the requirements should be met by new holding acquisitions, not by existing ones. 11. Legal and tax issues BME welcomes the initiatives of the Communication with regards to the legal certainty project and tax issues. In order to ensure that the work of the legal and tax groups is useful from the beginning, it is very important to clearly define the scope of their work. In BME s view, and given the complexity of the matter, the work of the group should be divided in two phases. In the first phase, only greater legal issues that effectively impede cross-border settlement should be tackled and harmonised, leaving the remaining for a second phase. The group should coordinate its work with the representatives of ESCB-CESR Working Group and any other fora, as already pointed out in section 4 of these comments. In particular, it should be cleared as soon as possible whether the The Hague Convention on the law applicable to certain rights in respect of securities held with an intermediary is going to be ratified, and, if so, whether the Recommendation 1 of the ESCB-CESR standards is fully compatible with the cited Convention. As it has been said above, legal harmonisation should not, in any case, lead to a legal top-down harmonisation, i.e. reducing more strict legal certainty requirements currently in place in certain jurisdictions. 14