The London Stock Exchange has joined its customers in calling for a single clearing and settlement system that provides non-discriminatory access for competing exchanges. The economics are simple. Every company issuing securities and every investor would prefer records and transaction-processing to be in one place. Netting of trades would become possible on a European, not just a domestic basis. The capital deployed in supporting trading would be much lower. The cost of capital to companies would fall and the overall health of Europe's economy would improve. The US has had such an infrastructure since the 1970s. If it were replicated in Europe, the cost per share transaction would be about a seventh of what it is today.
Savings in direct costs - the money paid directly to clearing and settlement companies and custodian banks, not counting money spent on expensive back offices - would total more than #1 billion (£790 million) a year.
So why has a single clearing and settlement agency not been created? The answer is that it requires political will from governments and competition authorities to overcome shareholders' resistance.
In the US, the Securities and Exchange Commission together with the power and weight of Congress forced the seven exchanges to merge their clearing and settlement businesses, stripping away between 11 per cent and 50 per cent of the exchanges' profits.
In Europe, the situation is even more complex. There are 26 different clearing and settlement businesses, most owned by exchanges. Their combined losses resulting from the creation of a single system would be as high as #300 million a year. In addition, Europe's constitution and institutional structure make it harder to act as the US did. Indeed, in many cases the domestic laws of member-states protect these domestic systems.
Europe needs to take a different tack - one that does not require new laws or directives. The best way to achieve this in the short term is through the European Commission's existing powers to pursue anti-competitive behaviour by companies and crack down on member-states that fail to promote the single market. To that end, the Commission must ensure fair, reasonable and non-discriminatory linkages between clearing and settlement organisations; prevent undue discrimination between domestic and cross-border trades; and stamp out cross-subsidy between the provision of clearing and settlement and the provision of exchange services. It must also end practices such as tying the use of an exchange to a particular clearing and settlement system, offering bundled tariffs and discriminating in the provision of access and services. Such action will pave the way towards a single system. However, harsher initiatives may be required to speed the consolidation process. First, the Commission could set maximum charges for clearance and settlement services based on an efficient system, not a company's actual costs. This is something the Commission did in the early stages of telecommunications liberalisation when it established UK charges as a benchmark. Here the benchmark could be the US. The effect would be to reduce the profitability of the exchanges' clearance and settlement businesses and force them to move towards more efficient methods. In short, it would oblige them to start looking at the possibility of using a common system. Second, the Commission could impose a structural rule prohibiting exchanges from owning clearing and settlement agencies. Third, the Commission could explore the possibility of an imposed solution, as happened in the US. This might need a Treaty change. Difficult, particularly because this would run the risk of introducing further delays. However, it could be achieved if the political will was there.
The writer is chairman of the London Stock Exchange.
