Charles McCreevy, the EU's internal markets commissioner, has no inclination to add to the financial services industry's regulatory fatigue. Or so he said in a speech in Luxembourg in September. That said, he probably won't have any choice but to do so.
McCreevy speaks for most of the financial services sector when he laments the persistence of high cross-border trading costs in Europe. Like everyone else, he blames the fragmented clearing and settlement infrastructure, inherited from national markets. But although there is consensus on the problem, there is no consensus on the solution. The industry is unlikely to find one by itself.
Mutually optimal collective-action solutions are rare enough even among groups that have common incentive structures, but pan-European investment banks based in London, fund managers, exchange operators, and national clearing houses do not share the same interests.
From the pan-European investment bank and fund manager perspective, lower cross-border clearing and settlement costs are clearly desirable. For national clearing houses they are clearly not.
Some investment banks and fund managers believe that greater competition in clearing and settlement is a solution. But multiple clearing and settlement options for the same securities would be costly and complex, so any competition would likely be for markets variety, rather than involving competition within markets. In other words, competition would likely be limited to periodic reviews of clearing service providers. But technical complications and prohibitive costs make clearing and settlement arrangements with exchanges sticky by nature, so competitive pressure would likely be limited at best.
Clearing and settlement is often described as the plumbing of financial markets. No household would install two sets of pipes just so that it could choose its water supplier.
The centralized clearing and settlement infrastructure of the US has been crucial to the vigorous exchange competition in that market. Although many investment banks and fund managers dream of having a single central counterparty for Europe, the market, left to find its own solution thus far, has ended up with more rather than fewer clearing houses since 2000. A single central counterparty is the best solution for lowering the costs of cross-border trading in Europe and one worth regulating for.