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					The organisation of securities
   clearing and settlement
  infrastructures in Europe

           Gisèle Chanel-Reynaud
             Dominique Chabert

     IEF Department, University Lyon 2
    GATE (Groupe d'Analyse et de Théorie
     Economique) UMR CNRS 5824 CNRS


   Université Lumière Lyon 2 - ENS LSH
                                           1
The organisation of securities clearing and settlement infrastructures in
                                 Europe




      Purpose of our presentation

   – Examining the current evolutions of
        • Trading
        • Clearing                            infrastructures in Europe…
        • Settlement


   – … to implement a « domestic
     securities area »

                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                            2
The organisation of securities clearing and settlement infrastructures in
                                 Europe



      Purpose of our presentation

• Describing the movements of the components
  of financial infrastructures
• Analysing the complexity of the current
  evolutions
• Highlighting:
   - C&S’s specificities;
   - limits that public authority should impose to the
     current trends;
   - functions
       - That may or should remain within the competition
       - That may or should be collectively managed

                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                            3
The organisation of securities clearing and settlement infrastructures in
                                 Europe




       Outline of our presentation

1. Introduction: the framework of
   Financial Infrastructure
2. The reconstruction of European
   Financial Infrastructure
3. C&S : Technological Industry or
   Financial Industry ?
4. Concluding remarks

                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                            4
The organisation of securities clearing and
   settlement infrastructures in Europe




   1. The framework of
      financial infrastructure



                                              5
 The organisation of securities clearing and settlement infrastructures in
                                  Europe


        The « legend » of financial
               integration…

• Immateriality of markets: electronic
  trading, dematerialization of securities,
  real time payment…
• …For a quick worldwide integration of
  capital markets
   – For allocative efficiency
   – For informational efficiency
   – For operational efficiency
                  Gisèle Chanel-Reynaud - Dominique Chabert
                   Université Lumière Lyon 2 - ENS LSH
                                                                             6
The organisation of securities clearing and settlement infrastructures in
                                 Europe



                             …to forget

• Finance is based on heavy
  infrastructures:
   – Trading systems
   – Clearing systems
   – Delivery and settlement systems /
     Payment systems



                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                            7
The organisation of securities clearing and settlement infrastructures in
                                 Europe



             Markets infrastructures
             …or « Tectonic finance »

  • The relocation of market infrastructures looks
    like plate tectonics: the European financial
    geography is changing under the influence of
    the displacement of the different
    infrastructures’s markets layers.

  • Relocation of infrastructures is more or less
    controlled, more or less consistent.

                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                            8
The organisation of securities clearing and settlement infrastructures in
                                 Europe



               The orga nisation a round the clearing systems


L SE           V i r t -X                E U R O N E X T                D . B ö r se

                                                                           E U RE X


             L C H . C le a r ne t



                                                                   E u r oc le a r
           E u r oc le a r B a n k/C r e s t                                           C l e a r s tr e a m
                                                                     F r a nc e

                   SIS                   C I K f u tu re           E u r oc le a r N e d e r la n d
                                                                         ( e . g . N e c i g e f)
                                          E u r oc le a r
                                          B e lg iq u e

       Source: F rom an “up to date” E uroclear diagram .



                       Gisèle Chanel-Reynaud - Dominique Chabert
                        Université Lumière Lyon 2 - ENS LSH
                                                                                                              9
The organisation of securities clearing and settlement infrastructures in
                                 Europe




  This chart shows the complexity
  of the current market
  infrastructure’s evolution



                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        10
The organisation of securities clearing and
   settlement infrastructures in Europe



   2. The reconstitution of
      European Financial
      Infrastructure


                                          11
The organisation of securities clearing and settlement infrastructures in
                                 Europe



What is a Financial Infrastructure ?

 • A Financial Infrastructure (FI) includes
   3 levels:
   - Regulation infrastructures
   - Payment infrastructures
   - Markets infrastructures:
          • Trading system
          • Clearing systems
          • Settlement systems


                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        12
The organisation of securities clearing and settlement infrastructures in
                                 Europe



Financial Infrastructure used to be organized on a
                   national basis


                                PAYM ENT AREA




                               R E G U LA T IO N A R E A




                               O R G A N IS A T IO N O F
                               EXCHA NGES A REA


             In frastru ctu re of a n ation al fin an cial p lace
                       3 « sup erim p osed » sp aces

                  Gisèle Chanel-Reynaud - Dominique Chabert
                   Université Lumière Lyon 2 - ENS LSH
                                                                        13
  The organisation of securities clearing and settlement infrastructures in
                                   Europe


                             A stylistic view of Financial Infrastructure




                                                                                                     ES P ACE COUR
                              S UEDOIS E + 1 0 ENTRANTS (2 0 0 4 )


                                                                     M C2 / ES P ACE COOUR ONN E




                                                                                                                                         ES P ACE LIVRE S TRERLIN G
  Pay ment space




                                                                                                                                                                                       P A Y M E N T A RE A




                                                                                                                   ONN E DA NOIS E
                                                                                                                                                                                        « E U RO S P A CE »
     Regalu ati on s p ace




                                                                                                                                      2 5 R E G U L A T IO N S P AC E S
                                                                                                                                                                      FR    B      P        NDL



                                                                                                                                                                      E UR ON E XT GR OUP
Organ is ati on




                                                                                                   O R G A N IS A T ION A L SP A C ES
                                                                                                                     2 c e n tra le s d e rè g le m e n ts in te rn a tio n a u x

                                                                                                                                     T h e E u ro p ea n f in a n cia l in f ra s t ru ct u re
                                                                                                   Gisèle Chanel-Reynaud - Dominique Chabert
                                                                                                    Université Lumière Lyon 2 - ENS LSH
                                                                                                                                                                                                              14
The organisation of securities clearing and settlement infrastructures in
                                 Europe




Rhythms without synchronization


• Regulation and payment infrastructures: a
  will for a « public policy »



• Markets infrastructures: a market approach.
  Free competition is expected to harmonize
  “at the bottom” what the authorities can not
  harmonize “at the top”.
                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        15
 The organisation of securities clearing and settlement infrastructures in
                                  Europe




• The great number of national bodies:
   – increases the trading costs in the European markets
     (notably, as compared to American markets),
   – increases the risks (particularly, the pending risk)
   – harms liquidity (in the absence of real-time operation
     and standardisation procedure).

• The pressure for consolidation is extremely
  strong in this field. Market intermediaries may
  indeed find in this concentration process,
  significant cost-cutting sources.


                  Gisèle Chanel-Reynaud - Dominique Chabert
                   Université Lumière Lyon 2 - ENS LSH
                                                                         16
The organisation of securities clearing and settlement infrastructures in
                                 Europe




• But this way is hardly compatible with
  an increasingly strong private financial
  industry, which is likely to result in
  monopoly positions.




                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        17
The organisation of securities clearing and settlement infrastructures in
                                 Europe




 The concentration of

 – trading within one single location (even if it is a
   network)

 – clearing

 – settlement-delivery

    would raise important questions in terms of systemic
    risk prevention.


                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        18
The organisation of securities clearing and
   settlement infrastructures in Europe



   3. C&S: Technological
      Industry vs Financial
      Industry ?


                                              19
The organisation of securities clearing and settlement infrastructures in
                                 Europe


3. C&S: Technological Industry vs
      Financial Industry ?
 What is the “status” of clearing and settlement ?
      • An industry that “manufactures”
        securities…
      • …but a specific industry that also
        “manufactures” property rights
      The C&S industry: an industry which
        operates
      • …in a banking system and
      • …not in an industrial system !
                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        20
The organisation of securities clearing and settlement infrastructures in
                                 Europe




• Through this consolidation process, it is
  important to keep in mind the specific nature
  of the financial transactions that are
  processed, and the resulting risks

• The current consolidations generate a certain
  “gender mix” and roles between different
  intermediaries that may cause inefficiency and
  unjustified monopoly situations

                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        21
The organisation of securities clearing and settlement infrastructures in
                                 Europe


3. C&S: Technological Industry or
   Financial Industry ?


3.1 C&S: a « heavy » industry

       The C&S has risen up with markets’
       imperfection : how to deal with
       complexity ?



                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        22
The organisation of securities clearing and settlement infrastructures in
                                 Europe


(a) The industrial features of
clearing
•From an industrial point of view… clearing
houses are devoted to the optimization of
exchanges
•What is at stake for European clearing is the
"One stop shopping" principle:
   –A central counterparty
   –A unique clearing house for several markets and
   several products
   –A unique legal and regulatory environment
   –A unique and integrated IT tool
                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        23
The organisation of securities clearing and settlement infrastructures in
                                 Europe

(b) The industrial features of
securities settlement:

• GC manage the absence or insufficient
  links between CSDs

• GC provide securities services in an
  international environment through their
  subcustodians network


                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        24
The organisation of securities clearing and settlement infrastructures in
                                 Europe




  • Consolidation will simplify cross-border
    settlement whatever the model is emerging:
      – Direct links
      – Multi-access model
      – Hubs




                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        25
 The organisation of securities clearing and settlement infrastructures in
                                  Europe




• From this point of view, C&S can
  be regarded as a two-level
  network industry:

       Infrastructure (« natural
       monopoly »)

       Securities settlement services for
       investors
                  Gisèle Chanel-Reynaud - Dominique Chabert
                   Université Lumière Lyon 2 - ENS LSH
                                                                         26
The organisation of securities clearing and settlement infrastructures in
                                 Europe




  • Settlement can be regarded as a « rival
    good »…and a pure logistic activity



  • For Custody function, it is less evident:
      – Custody: a « warehouse »
      – Custody: an « information » centre



                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        27
The organisation of securities clearing and settlement infrastructures in
                                 Europe




3. C&S: Technological Industry or
   Financial Industry ?
• An approach in terms of technological finance

• Implies that current process should be
  analysed in both technological and financial
  components.
• In particular, the narrow links between
  securities and money imply to enrich the
  purely industrial analysis by a financial
  approach of clearing, settlement and custody
  (especially because of potential systemic
  risks).        Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        28
 The organisation of securities clearing and settlement infrastructures in
                                  Europe


3. C&S: Technological Industry or
   Financial Industry ?
3.2    C&S: a full component of Finance


        • The case of clearing (a)

        • The case of custody (b)

        • To go further : banks as infrastructure
          producers (c)

                  Gisèle Chanel-Reynaud - Dominique Chabert
                   Université Lumière Lyon 2 - ENS LSH
                                                                         29
The organisation of securities clearing and settlement infrastructures in
                                 Europe


(a) Clearing: producing collective
             security
• From a “financial point of view”, we may
  consider the market security as a “collective
  good” (CCP function)

• With this feature, it has to be ensured by a
  body accounting for its activities whose
  particular nature is not necessarily considered
  by the prudential rules.

             – Novation
                                             collective functions
             – Netting
                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        30
 The organisation of securities clearing and settlement infrastructures in
                                  Europe




• Clearing: a function which can be
  assumed by a private entity (ex CLS)…

• …but with connection with public
  concern
   – LCH.Clearnet operates netting on securities,
     derivatives, commodities
   – It implies a particular monitoring



                  Gisèle Chanel-Reynaud - Dominique Chabert
                   Université Lumière Lyon 2 - ENS LSH
                                                                         31
The organisation of securities clearing and settlement infrastructures in
                                 Europe


(b) The securities custody: between
collective service and “rival goods”

• The intermediaries in charge of securities
  custody, are of two types:

        CSD: centralizing intermediaries /
        « Financial community » oriented /
        « certification » function: a « notary »
        function
        Custodians: market intermediaries /
        customer oriented
                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        32
The organisation of securities clearing and settlement infrastructures in
                                 Europe



 2 parallel worlds: the money world and the securities
 world

           MONEY                                             SECURITIES
        Central bank                                  Central depositary


 Bank A             Bank B                  Custodian A           Custodian B


 Agent X          Agent Y                          Agent X           Agent Y
                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                                33
The organisation of securities clearing and settlement infrastructures in
                                 Europe


     CSD : a central function and an
        “essential facility” ?

• Checks the strict reconciliation
  between securities under custody and
  issued securities ⇒ no place for a
  “securities multiplier”

• Operates the interbank SSS


                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        34
The organisation of securities clearing and settlement infrastructures in
                                 Europe


     CSD : a central function and an
       an “essential facility” ?


• A central infrastructure
   – Use of central money for settlement
   – Dedicated to interbank relations (possible
     negative externalities)
   – SSS reduces asymetric informations (DVP)




                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        35
The organisation of securities clearing and settlement infrastructures in
                                 Europe


     CSD : a central function and an
        “essential facility” ?

• The solution of the non-profit making
  entity is not necessarily the best
• What matters is that users have the
  possibility to directly control these
  entities
   – Banks
   – Securities holders
   – Issuers
                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        36
 The organisation of securities clearing and settlement infrastructures in
                                  Europe


       Custodians : peripheric actors
• Even if their activity is related to the
  development of institutional funds which
  multiply their cross-border operations and try
  to widen their asset portfolios,

• GCs provide value-added services lined up
  with core businesses:
   –   repos,
   –   collateral management services,
   –   corporate trust services,
   –   securities lending activity,
   –    Proxy voting…)
                  Gisèle Chanel-Reynaud - Dominique Chabert
                   Université Lumière Lyon 2 - ENS LSH
                                                                         37
The organisation of securities clearing and settlement infrastructures in
                                 Europe



       (c) Banks are becoming
    « infrastructures producers »
      Blurring between intermediaries / market
                   infrastructures
• In a functional approach
  Markets functions can be assumed by different
  institutions:
   – Trading: stock-exchanges/MTF/ in house plate-forms
   – Clearing: « classical » clearing houses / private clearers
   – Settlement: (I)CSD / (Global) custodians
  No more clear distinction between market
  infrastructures / market intermediaries

                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        38
The organisation of securities clearing and settlement infrastructures in
                                 Europe



       (c) Banks are becoming
    « infrastructures producers »
• Traditionaly, banks tend to externalize their
  risks on markets
   – Counterparty risk
                                              risk « outsourcing »
   – Credit risk


• In housing practices mean that banks, as
  infrastructures producers, « insource » risks


                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        39
The organisation of securities clearing and settlement infrastructures in
                                 Europe




               Concluding remarks
• Regulation in the field of C&S seems
  necessary, because it is a banking core
  function
• Harmonization of regulations is necessary :
  an unified regulation…(one FI) but with
  several markets infrastructures
• The directive project may separate the
  infrastructure managers and banking and
  financial services providers.
• A relevant point of view…but !…
                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        40
The organisation of securities clearing and settlement infrastructures in
                                 Europe




               Concluding remarks

• We think that this border line corresponds to
  the previous conception of markets
• When banks can « produce » infrastructures
  and where infrastructures can also have
  banking activities, one should distinguish:
   – Infrastructures producers whatever they are banks
     or « traditional markets », MTF…
   – …and banking and investment services



                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        41
 The organisation of securities clearing and settlement infrastructures in
                                  Europe




                Concluding remarks

• In this way, a first step would be the
  integration of custody in « investment
  services » defined by the new Instruments
  and Financial Markets Directive

• There are some limits to impose to the pure
  industrial approach of finance:



                  Gisèle Chanel-Reynaud - Dominique Chabert
                   Université Lumière Lyon 2 - ENS LSH
                                                                         42
The organisation of securities clearing and settlement infrastructures in
                                 Europe




               Concluding remarks

• In order to better ensure the savings
  protection
• In order to clarify the roles between
  centralizing intermediaries and market
  intermediaries
• In order to avoid any risk generated by a
  clearing problem

                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        43
The organisation of securities clearing and settlement infrastructures in
                                 Europe




               Concluding remarks

• In order to avoid a systemic risk generated
  by a settlement or custody problem

• In order to ensure a better control of the
  influence of the securities custodians
  regarding corporate governance


                 Gisèle Chanel-Reynaud - Dominique Chabert
                  Université Lumière Lyon 2 - ENS LSH
                                                                        44

				
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