Clearing and Settlement in the European Union The way forward

Transcription

1 HELLENIC EXCHANGES GROUP RESPONSE TO THE MARCH 2004 COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Clearing and Settlement in the European Union The way forward July 2004

2 1. Introduction Hellenic Exchanges S.A. ( HELEX Group ) is a Greek holding company, whose ordinary shares are listed on the Athens Stock Exchange. Helex s, subsidiaries are companies which are in charge of the organization and well functioning of the Greek regulated markets and relevant system infrastructure. HELEX Group submits by this present its response to the March 2004 Communication of the Commission to the Council and the European Parliament on 'Clearing and Settlment in the European Union The way forward'. The said response is the outcome of a joint work being undertaken by the following Companies-members of the HELEX Group: Athens Exchange S.A. ( ATHEX ): ATHEX is the market operator of the Greek Regulated Markets including Cash Markets, such as Equities Markets, Private Bonds Market, Hellenic Depository Receipts, EKAA Units Greek Spot, as well as Derivatives Market. The said corporate name is the new name of Athens Stock Exchange S.A. following its merger with Athens Derivatives Exchange S.A. ATHEX is a full member of FESE and FIBV and an affiliated member of IOSCO and ECMI. Central Securities Depository S.A. ( CSD ): CSD is the Greek central securities depository which is responsible for (i) the clearing and settlement of all ATHEX cash transactions as well as for the settlement of ATHEX derivatives transactions subject to physical deliveries, (ii) the registration of dematerialized securities monitored by CSD s system, (iii) the corpatate actions processing and (iv) the assignment of ISIN codes to the said securities. CSD is also a member of ECSDA, ANNA and ISSA Athens Derivatives Clearing House S.A. ( ADECH ): ADECH is the Greek central counterparty clearing house (CCP) which is responsible for the clearing and settlement of all ATHEX derivatives transactions as well as for the proper performance of the said transactions acting in its capacity as a CCP. ADECH is a member of EACH. 2

3 The HELEX Group fully supports the work (and the relevant consultation process) undertaken by the European Commission in the field of clearing and settlement within the European Union in order to determine and clarify EU s main policy issues in this field and to promote the efficient and proper functioning of securities clearing and settlement arrangements in the EU financial markets. Furthermore, the HELEX Group considers that it is extremely crucial for the works of European Commission in progress, that the European Commission is able to take into consideration the views of the various market players before deciding on the proposal of either specific recommendations-standards or on the adoption of common regulatory framework. For further clarifications on this response, inquiries should be directed to the co-chairmen of the HELEX workgroup: Mr S. Alifierakis (S.Alifierakis@csd.ase.gr), Operations Director, Central Securities Depository S.A., or Mr K. Tantis (C.Tantis@adech.ase.gr), Clearing Director, Athens Derivatives Clearing House S.A. 2. Comments HELEX would like to state that it generally supports the comments provided by ECSDA and FESE on the issues raised by the communication as its subsidiaries, being members of these organizations, have contributed to the formulation of these comments. HELEX recognizes that the landscape of clearing and settlement services provided by national clearing and settlement houses and other types of intermediaries within the EU is becoming increasingly complex during the last years and the roles of these institutions are, in many cases, bluring and confusing. Concerning cross-border securities settlement, we agree with the EC's identification of three main channels for the provision of these services, however we would prefer to see greater quantitative analysis with respect to recognizing the costs and risks related to each of these channels and the perceived problems. 3

4 As CEPS has presented in an analysis in 2001, the vast majority of operations as well as the vast majority of costs associated with cross-border clearing and settlement occur though channel 2 the custody channel. In our opinion, this comes as a direct result of the fragmentation existing within European Union with regards to legal and tax arrangements, which require the hiring of local expertise, that is local custodians, in order for an investor to participate in a market and cope with the technical issues of this participation (compliance to legal and regulatory framework, access to central systems, exercise of its proprietary rights, etc). We would prefer that the efforts of the Commission are not exclusively focused on the proposals for intervention targeted solely at the CSDs and ICSDs in Europe, but also pay much consideration to cross border equities business currently handled through the agent banks. Advisory and Monitoring Group HELEX welcomes the establishment of senior Advisory and Monitoring Group, and specialist tax and legal groups, to address these issues which were identified by the Giovannini reports. However, we would like to point that such an Advisory Group and the specialist sub-groups should operate under a clear mandate, focus on real substantive work, have a relatively high frequency of meetings and work against specific deadlines. A framework directive HELEX fully supports the EC on its intention to provide pan-european passport facilities to infrustructure providers such as CSDs and CCPs and access rights through the proposed directive. Apart from the issues relating to the pan-european passporting and the freedom of access, we are in doubt whether a directive along the lines described in the communication would indeed make a major contribution to some of the issues that are part of the discussion relating to clearing and settlement or that it would provide material 4

5 benefit for customers (issuers or investors). Thus we estimate that further analysis and further public discussion on these issues is highly necessary. Furthermore, we consider extremely important that any directive would explicitly have only a framework character under the Lamfalussy process and not involve unnecessary and undesirable detail that would stifle innovation. Hoowever, it should be stressed out that the establishment of a common language in the post-trading industry, namely the determination of services offered and the definition of the criteria employed for this determination, is, to our view, a Level 1 issue. Maximum harmonization at the notions used and the categorizations employed is, to our opinion, extremely important for the smooth later functioning of the common post-trading European market. The achivement of a common language is essential, given the extremely fragmented legal and tax environment in the various Member States. It would not be an exaggeration to say that the new Directive must resemble the effect of a successful plastic operation, in order to achieve the functioning of a single post-trading regime within a fragmented tax and legal background. Definitions, core and value-added services The role and the scope of intervention of all players in the field of Clearing & Settlement ((I)CSDs, CCPs, Clearing members, Custodians, Banks, Brokers and other intermediaries) presents significant differences from country to country due, mainly, to the absence of commonly accepted definitions of the terms clearing, settlement and custody at a pan-european level. Such situation derives, in its turn, from important differences in the architectural concept of each national capital market as also from important differences among the national securities, corporate and tax laws and regulations. Consequently, a first major step towards the objectives set out by the Commission should be to give a clear, common definition for each function related to the finalisation of securities and derivatives transactions at a pan-european level. More specifically, we 5

6 insist that, common European definitions should be established for the following functions: Clearing, Settlement, Registration/notary Custody and asset servicing There is no clear view, at present, which of these functions are core with regard to the role of the participant in the post-trading area and accordingly we believe it would be extremely difficult to elaborate a set of harmonised standards to apply. A distinction between infrastructures and participants therein, in other words a limited use of the institutional criterion, might be proven extremely handful for the determination of the core or non-core character of the various post-trading services offered. The elaboration of definitions, without the ab initio preclusion of a combination of an institutional with the functional approach, however complex and troublesome, would facilitate the competent EU authorities to distinguish which are the core and value added services for each type of institution and to better establish common rules applicable to each segment of the finalisation process', based on risk management efficiency. Henceforth, in this approach, which starts from the functional definitions and results to the determination of the core services in the post-trading area, it is crucial to underline the importance of keeping the rationale of a centralized securities system for clearing, settlement, registration and other similar purposes. By the term system we mean an arrangement of more than two participants, which operates solely towards its members assuring the finalization of transactions for the benefit of the whole market to whom it is referring to. The concept is not unknown in the European financial law, since this very term has been used in many secondary legislation, such as the Settlement Finality Directive et.c. Such systems, supported usually although not exclusively- by the national CSDs/CCPs, contribute to the fulfillment of public policy objectives by undertaking a series of functions/services including: for CSDs: management of issues of securities, maintenance of accounting balances for the total amount of each issue of securities, arrangements ensuring finality of securities book-keeping as well as finalisation of transactions, usually through DvP mechanisms, 6

7 monitoring of shareholder information, monitoring and management of corporate actions etc, and for CCPs/other clearing arrangements: clearing services, including, inter alia, monitoring and/or netting of positions in financial instruments, calculation of the obligations arising from relevant trades and assurance of the proper performance of the trades concerned.. It is notable that the functions performed by a central system are totally different from similar functions undertaken by its participants with respect to their clients, as these act solely on the basis of bilateral arrangements at a second intermediation level. Consequently, these functions performed at this second intermediation level need to be subject to similar, with respect to the central systems, but not equal functional definition. Based on the above rational, we express the opinion that core services attibuted to central systems operating in each area, clearing, settlement, custody/asset servicing, registry/notary should be distinguished from those services provided by entities acting at a second indermediation level. In addition, consideration should be given to those services, basically of informative nature, provided by the CSDs to the public authorities. We believe that there is much value in the core functions of central systems and we agree with the public policy concern that such functions like registry/notary need to function perfectly well as part of the overall investor protection policies. In addition we believe that such core functions need to be legally and financially ring fenced, however, not thourgh a total separation of functions. Legal and taxation issues HELEX believes that the origins of problems relating to cross-border transactions are to be located in the area of legal and tax dis-harmonization. It is our opinion that true integration of European capital markets, riskless movement of securities cross-border and lowering of associated costs can only be accomplished if there exists a common, clear set of rules as far as issuance, clearing, settlement and custody of securities are concerned, but also with regard to the nature of securities, the nature of securities holders rights, the international circulation of securities and the most efficient supervision 7

8 of the markets. In addition, we believe that legal provisions affecting corporate actions processing should be harmonised, as well as taxation issues arising with regards to the cross-border movement of securities and the corporate actions. Governance With regard to the governance issues, HELEX strongly supports the comments provided by ECSDA on the subject. We would like also to note that the provisions for the governance of CSD, CCPs and other infrastructure services providers should be alligned with the provisions of the EC proposed directive on statury audit. 8