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Europe needs a solution to the clearing conundrum

Competition in clearing and settlement doesn't work. The US shows that only a centralized clearing system can promote vigorous exchange competition.

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.

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