Integration, regulation, and policy of securities market infrastructures in the euro area
| DOI | https://doi.org/10.1108/13581980610711117 |
| Pages | 328-347 |
| Date | 01 October 2006 |
| Published date | 01 October 2006 |
| Author | Heiko Schmiedel,Andreas Schönenberger |
| Subject Matter | Accounting & finance |
FEATURE ARTICLE
Integration, regulation, and policy
of securities market
infrastructures in the euro area
Heiko Schmiedel
Directorate General Payment Systems and Market Infrastructure,
European Central Bank, Frankfurt, Germany, and
Andreas Scho
¨nenberger
European Central Bank, Frankfurt, Germany
Abstract
Purpose – The purpose of this paper is to investigate the state of integration of securities market
infrastructure in Europe.
Design/methodology/approach – Given the lack of quantitative and price-based measures, this
paper adopts a rather qualitative approach to evaluating the degree and evolution of integration in the
securities market infrastructure within Europe. Future challenges, policy options for regulation and
market design are discussed.
Findings – Despite its single currency, the euro area securities infrastructure remains highly
fragmented due to cross-border differences in tax regimes, procedures, laws, and vested interests. Cost
savings and increased efficiency can be expected from further integration.
Originality/value – This is the only paper which provides a comprehensive and comparative
analysis of the current level of integration of the securities infrastructure in the euro area and its
implications for regulation and market policy.
Keywords Securities markets,Euro, Europe
Paper type Research paper
1. Introduction
The European securities infrastructure has developed rapidly throughout the last
decade. The introduction of the euro has accelerated the development of securities
market infrastructures into increasingly integrated and consolidated market structure s
comprising financial exchanges and clearing and settlement systems[1]. A number of
legal and regulatory initiatives and measures have been adopted with the aim of
achieving an integrated financial services market. At the global level, there has been
growing interest among institutional and individual investors in maximising the
positive effects of international portfolio diversification, resulting in a rapid expansion
in cross-border securities transactions. Technological innovations have spurred these
fundamental changes, causing less dependency on physical market locations and
thereby exposing market participants to an increasingly competitive environment in
both the domestic and the global arena.
The integration of European financial and securities infrastructures is an important
issue in order to fully exploit the benefits arising from a more homogeneous euro area
securities market. Economic theory and empirical evidence suggest that the integration
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JFRC
14,4
328
Journal of Financial Regulation and
Compliance
Vol. 14 No. 4, 2006
pp. 328-347
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980610711117
and consolidation of financial markets and infrastructures within the EU would lead to
additional business and investment opportunities, lower cost for cross-border
transactions, improved opportunities for diversification, and more efficient allocation
of capital.
Against this background, the main objective of the paper is to evaluate and assess
the current level of integration of the securities infrastructure in the euro area.
Moreover, the present paper analyses current developments. It further discusse s
possible implications for future policy and market design. The focus of this study is
exclusively on the euro area and its member countries. Given the lack of quantitative
and price-based measures, this paper adopts a rather qualitative approach to
evaluating the degree and evol ution of integration in the secu rities market
infrastructure within Europe.
The remainder of this paper is structured as follows: Section 2 reviews briefly recent
literature. Section 3 presents a common definition of integration that has been ap plied
to the securities infrastructure, before discussing possible conflicts of interest in the
consolidation process. It continues by providing a comprehensive overview of
the securities infrastructure landscape in Europe, with a particular view to assessing
the degree of integration that has been achieved so far. Section 4 focuses on existing
barriers to integration and discusses further challenges, possible options for policy and
market design as well as recommendations for action. The final section concludes.
2. Review of literature
Despite its importance for the prosperity, efficiency and stability of European financial
markets, it is only recently that a few academic studies have focused atten tion on the
institutional set-up and the organisation of securities market infrastructures.
The empirical literature and cost studies in this area confirm that the current
arrangements in the European securities market infrastructure are less than optimal,
therefore, suggesting that there is a relatively high potential for cost saving especially
as far as cross-border clearing and settlement in Europe are concerned (Hasan et al.,
2003; Hasan and Schmiedel, 2004; Lannoo and Levin, 2001; Schmiedel et al., 2002; Van
Cayseele and Wuyts, 2005). Economies of conglomeration and critical mass are likely
to favour centralisation and consolidation of European trading, clearing and settlement
systems. Theoretical papers have proposed, sometimes contrary, solutions for po ssible
future market infrastructure design (Holthausen and Tapking, 2004; Koeppl and
Monnet, 2004; Milne, 2002; Rochet, 2004; Kauko, 2003, 2004; Tapking and Yang, 2004).
Given the limited number of contributions at this stage, relatively little can be
concluded from the existing literature regarding the degree of financial market
infrastructure integration. This paper attempts to fill this gap in the literature with a
comprehensive analysis of the current state of integration of securities infrastructure in
the euro area. Moreover, the paper discusses important future challenges for policy and
market design.
3. Integration of the European securities industry: definition and
developments
3.1 Definition of securities infrastructure integration
A careful analysis of the extent to which the European securities infrastructure is
integrated requires a common understanding of integration in terms of infrastructure.
Various definitions and approaches to measure financial integration at the micro and
Securities market
infrastructures
329
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