Evolution of European market infrastructure&Options for integration/cooperation among market infrastructures

Froukelien WendtSr. Financial Sector Specialist

The World BankDecember 14, 2011

A range of EU initiatives impacts European market infrastructures

Trading platforms CCPs CSDs

1999/2000:

2001/2003:

2006:

2007:

2009:

2012 and further:

FSAP / Lisbon Agenda

Giovannini reports

Code of Conduct

MiFID

ESCB-CESR Recommendations

MiFID2 & MiFIR EMIR SLD

Target2Securities

Legislation CSDs

2

The MiFID aims to create one single capital market in the EU through competition between market infrastructures

MiFID Objective: 1. Enhance competition in the single market, 2. Harmonize level playing field for the industry across member states, and 3. Protect investors (especially retail)

MiFID Pillars:Pillar I: single passport for investment firmsPillar II: free competition between trading platforms and best execution rulePillar III: powers of securities market regulators and cross-border cooperation

MiFID and post-trade infrastructure: art 35 and 46 contain access provisions, which basically enable the regulated market and MTF to gain access to the CCP and CSD of its choice.

3

The MiFID has strongly impacted market infrastructures, investment firms and their regulators

4

Impact of EU initiatives differs between Western Europe and Central and Eastern Europe

Western Europe Central and Eastern Europe Situation in 2006:

Profit margin market infrastructures High Low

Market liquidity High Low

Cross-border trading Increasing Limited

Impact since 2006:

MTFs Many MTFs created Some MTFs high market share

Few MTFs

Stock Exchanges Mergers and alliances Loss of market share

Some alliances

CCPs Some new CCPs created Mergers and alliances

Loss of market share to MTFs

Few CCPs and limited cooperation

CSDs Mergers and alliances Few alliances

Prices and cost of market infrastructures

Significant overall decrease No significant impact

Cross-border trading MTFs offer access to range of Pan- European equities

Few shares are tradable on new MTFs (e.g. from Austria)

Regulators Increased cooperation Increased number of MoUs

Increased cooperation

5

Competition between trading platforms in Western Europe affects national monopolistic structures

Source: www.thomsonreuters.com

LSE Group down from 28% to 21%

Central and Eastern European exchanges equal at 1%

Deutsche Börse down from 17% to 12%

NYSE Euronext down from 22% to 16%

Other platforms down from 26% to 22%

MTF CHI-X up from 5% to 19%

MTF BATS Europe up from 0% to 6%

MTF Turquoise up from 1% to 3%

Market shares of trading platforms in European equities changed significantly since 2008

6

Competition has caused significant decreases in prices and costs of market infrastructures

Trading platforms CCPs CSDs

Note: for trading platforms, the cost per on-book trading transaction is shown; for CCPs, the cost pr central counterparty clearing transaction is shown; and for CSDs, the cost per clearing and settlement transaction is shown. Changes in the costs of account provision and asset servicing are not presented here.

Source: Oxera, ‘Monitoring prices, costs and volumes of trading and post-trading services’, May 2011

Change in the costs per transaction of using trading platforms (equities), CCPs (equities) and CSDs (equities and fixed income securities), 2006 - 2009

-100

-80

-60

-40

-20

0

20

Pe

rce

nta

ge

ch

an

ge

in c

ost

Majority of trading

platforms, CCPs and CSDs

decreased their prices and costs, sometimes more

than 80%

7

In Western Europe trading platforms, CCPs and CSDs are merging across borders

Luxem

bourg

SE

LCHClearnet SA

LCH.Clearnet Group ltd

Euronext

Amsterdam + Brussels +

Lisbon + Paris

Euro

clear

NL

Eurocle

ar

Belgiu

m

Bank of

England

London

SE

Borsa

Italia

na

CC&G

Deut

sche

Börse

Eurex

Clea

ring

Clear

stream

BL

Clear

stream

BF

Riksbank

VP

TARGET2

Euro

clear

Finland

Euro

clear

Sweden

Danish

National

bank

EUI

Inter

bolsa

Banco de

Portugal

EMCF

clearing trading

settlement

cash settlement

Bank of

Finland

Bundes

bank

BCL

DNB

NBB

Banque

de

France

Banca d´

Italia

CCP.A

National

Central

banks

National

CSDs

CCP in

Poland/

Hungary

Wiener

Börse

OENB

OEKB

Austria

LCH.

Clearnet

Ltd

Euro

clear

Franc

e

Swiss

NB

SWX

SIS

SIX X-

Clear

EU10 Nasdaq OMX Nordic

FI SW DK

Mon

te

Titol

i

8

New cross-border market structures have been established for trading and clearing of European large caps and midcaps

Equi-

duct

Chi-X BATS

EuroCCP

LCH.Clearnet SA

Tur

quoise

Smart

pool

EMCF

Nasdq

OMX

Quote Bur

gundy

trading clearing

settlement

cash settlement

Settlement agents

Settlement agents

Clear

stream

BL

Clear

stream

BF

Inter

bolsa

Euro

clear

NL

Euro

clear

Belgium

Euro

clear

France

EUI

Monte

Titoli

Iber

clear

VP

Euro

clear

Finland

Euro

clear

Sweden

SIS

Banco

de

Portugal

Bundes

bank

BCL

DNB

NBB

Banque

de

France

Bank of

Englnd

Riksbank Danish

National

bank

Bank of

Finland

Banca d´

Espana

Banca

d´ Italia

SNB

TARGET2

NYSE

ARCA

9

Central and Eastern European market infrastructures are potentially exposed to the same market forces as Western Europe

Strategies Key questionsStatus quo / organic growth Critical mass to ensure liquidity and market depth?

Attractive to listed firms and potential listings?Attractive to domestic and foreign investors?Profitable solution on the long term?Cross listing large caps on European exchange/MTF?

Regional integration and cooperation

Will regional cooperation have critical mass and improve the attractiveness of the local market ?Which alliance partners?What model for trading, clearing and settlement?Cross listing large caps on European exchange/MTF?

Alliance European/global exchange or MTF

Full integration or only on specific areas? Solution for the small and mid caps?Which alliance partners?What model for trading, clearing and settlement?

10

Regional stock market integration in Central and Eastern Europe has potential, but is dependent on economic growth

11

0 40 80 120

Ro+Bg+Sk+Rs+Hr

CEESEG

CEESEG+Ro+Bg+Sk+Rs+Hr+Pl

NASDAQOMX Nordic+Baltics

NYSE.Euronext (ex US)

Population size (million)

0 10,000 20,000 30,000 40,000

GDP per capita

0 1,000 2,000 3,000

Market cap (USD million)

Source: World Bank

The market infrastructure can be modeled according to the NASDAQOMX and CEESEG market infrastructures

Features:

Joint strategy

Harmonized rules

Harmonized listing requirements

Cross-membership

Single trading platform

Single clearing platform

Joint indices

Joint trade data packages

Joint promotional activities

Government and corporate securities

Settlementsecurities leg

Clearing

Listing

Settlement cash leg

CSD

Stock exchange

DVP

Stock exchange

TradingCommon Trading System

CSD

TARGET2 / National Central Bank

Common Clearing System

DVP

Stock exchange Stock exchange

CSD CSD

DVP DVP

12

Conclusions

• A new market infrastructure model needed in many EU10 countries

• EU initiatives support competition and thus request competitive market infrastructure models

• Goal should be to offer firms and investors deep and liquid markets

• A well-functioning market infrastructure alone does not guarantee deep and liquid markets; broad investor base and large range of solid firms are essential.

• Integration may offer the necessary critical mass and thus important benefits for firms and investors

• Integration should be beneficial for large, mid and small caps

• Coordination of these choices among regional policy makers is essential for success!

13