The Clearing and Settlement Industry: Structure, Competition and Regulatory Issues

32 Pages Posted: 16 Aug 2005

See all articles by Nadia Linciano

Nadia Linciano

Commissione Nazionale per le Societa e la Borsa (CONSOB)

Giovanni Siciliano

CONSOB (Commissione Nazionale per le Società e la Borsa)

Gianfranco Trovatore

CONSOB (Commissione Nazionale per le Societa e la Borsa)

Date Written: May 2005

Abstract

The structure and the development of the clearing and settlement industry have long been paid attention by national and international regulators. Given the key role of clearing and settlement for the growth, the integrity and the integration of capital markets, regulators are deeply concerned with the competition and the stability issues raised both by recent mergers involving securities markets infrastructure institutions (i.e. Central Security Depository - CSD) and by the increasingly fading distinction among intermediaries (i.e. banks acting as global custodians) and CSDs. The present study deals with these issues after focusing on the structural changes and the competitive dynamics in the industry, as well as on the regulatory initiatives already implemented or which might be carried out. The paper discusses the analogies in the competition involving global custodians and CSDs, on one hand, and issuer CSDs and investor CSDs, on the other hand. The analysis clarifies also the dynamic leading the issuer CSD to a hold a dominant position, in spite of the arrangement of links between CSDs aimed at improving the settlement of cross-border transactions. The focal conclusion stemming from the discussion is that the access to the core services provided by CSDs bears many similarities either to the access to natural monopolies in network industries or to the pricing strategies in platform industries, depending on whether a vertical view or a "getting on board both sides" view may be adopted. Under the former view, interactions between the post trading infrastructure, on one side, and issuers and intermediaries, respectively, on the other sides are separately modelled: therefore, the prescriptions of the access regulation could be regarded as a useful tool. Under the second view, the post trading infrastructure, either because of consolidation or contractual agreements with the trading structure, interacts with issuers and investors/intermediaries simultaneously: therefore, the setting of the platform industry may be appropriate. In the real world, the platform industry scheme may be referred to equities and other securities that trade mainly on exchanges and whose settlement occurs on the CSD chosen by the stock exchange (or CCP) which normally is also the issuer CSD. For securities that trade mostly on OTC markets, such as bond and government securities, given the existence of competitive pressures on the "issuer side" of the CSD business, the CSD may be considered as interacting with each side of the market separately and the access regulation may be regarded as the most suitable tool. In any case, regulation of prices should be coupled with the removal of the barriers, relating to differing legal, tax and regulatory frameworks, which prevent the development of an efficient Europe-wide clearing and settlement infrastructure (as extensively pointed out by the Giovannini reports). Moreover in order to grant the level playing field among CSDs, price regulation needs to be homogeneously implemented on an international basis, requiring therefore coordination among national regulators.

Keywords: Clearing and settlement, CSD, Global custodian, Antitrust law

JEL Classification: G21, G28, K21

Suggested Citation

Linciano, Nadia and Siciliano, Giovanni and Trovatore, Gianfranco, The Clearing and Settlement Industry: Structure, Competition and Regulatory Issues (May 2005). Available at SSRN: https://ssrn.com/abstract=777508 or http://dx.doi.org/10.2139/ssrn.777508

Nadia Linciano (Contact Author)

Commissione Nazionale per le Societa e la Borsa (CONSOB) ( email )

Roma 00198
Italy

Giovanni Siciliano

CONSOB (Commissione Nazionale per le Società e la Borsa) ( email )

Via G.B. Martini, 3
Roma, 00199
Italy
+39-06-8477544 (Phone)
+39-06-8477612 (Fax)

Gianfranco Trovatore

CONSOB (Commissione Nazionale per le Societa e la Borsa) ( email )

Roma 00198
Italy

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