The voluntary code of conduct for central counterparties and central securities depositories, which calls on national clearing and settlement houses in the European Union to work towards interoperability and to open up to competition, will prove a weak force for transforming the EU’s post trade infrastructure in the way the European Commission would like, so the EC would do well to consider enforcing compulsory measures.
Competition as encouraged by the voluntary code is likely to be less than vigorous because the technical costs of switching are high and market-specific differences, including some tax rules, form barriers to competition by making it often necessary for any would-be competitor to develop separate systems for every market. This limits the extent to which they can benefit from economies of scale in an industry where economic viability is entirely driven by economies of scale and so limits the incentives for competing.
Another reason why the code of conduct will prove weak is because it is voluntary and many incumbent monopolies are unsurprisingly reluctant to voluntarily weaken their position by opening up to competitors.
The "vertical silo" model, in which CCPs, CSDs and exchanges join together and control the length of the trade cycle, is very attractive because it provides great cost and revenue synergies and effectively fends off competition. There is a real danger that competition between post-trade service providers might encourage many to seek such deals, which protect them from competition, rather than launch expensive assaults on foreign markets.
Although the vertical silo model may be appealing to the institutions threatened by competition, the problem is that it does little to bring down cross border post-trade costs, which is the aim of the EC.
The EC seems to have an idea of how it would like the market to evolve. It would like ideally to see pan-European competition between CCPs and pan-European competition between CSDs. In order to get the kind of competition it would like to see it might be better off considering compulsory rules to shape the market in the way it wants rather than allowing post-trade service providers to seek options that suit themselves best, which is what they will try to do if rules are simply voluntary.