INTERVIEW | “Something like a Big Bang” – centralising supervision and tearing down obstacles to cross-border competition – could be the right step forward in the regulation of the EU’s settlement scene, argues Karel Lannoo, head of Brussels-based think tank Centre for European Policy Studies. As one of few public commentators whose pulse can rise over financial “plumbing” matters, he is convinced that sharper policies could bring down infrastructure fees, benefiting end users and strengthening Europe in the race for the world’s investments.

“We have national monopolies which continue to function next to each other. There is an inertia of interests which keep these things from advancing. Then you have to do something like a Big Bang – like in telecoms, where regulators suddenly abolished roaming fees,” says Karel Lannoo

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“If you do that, you can come to a situation where all will win in the end because you will have more competition in the market – which will force the restructuring of the active entities, and more competitive pricing. At the moment, I don’t think we have competitive pricing between CSDs.”

Having started his career as the EU’s single market was being implemented through the 1980’s and early 1990’s – with big impact on the daily lives of ordinary people in areas such as telecoms and electricity – Karel Lannoo’s eyes turned to financial markets and their infrastructures later in the decade. As politician Alberto Giovannini was commissioned by the EU to identify measures to remove the barriers against efficient cross-border clearing and settlement in the EU, a survey of costs by Karel Lannoo and his independent think tank formed part of the intelligence going into the effort. Decision makers and industry representatives may risk a tongue-in-cheek comment from his side, yet he stays a familiar figure in their circles. Spanish exchange operator BME had him on its board from 2006 to 2018, as an independent director. He has led the Centre for European Policy Studies (CEPS) since 2000; its webpage lists over 80 employees. 

“You need to ask: how is this possible? Technologies have advanced enormously and we’re still having the same settlement cost as we had 20 years ago.”

Over twenty years on from the Giovannini report, Karel Lannoo is frustrated. 

“The EU has tackled some of the Giovannini barriers in the meantime, but many remain. The tragedy of the matter is that even if the EU has tried to do it – first with a Code of conduct, then later with the Central Securities Depository Regulation – the markets have remained very segmented,” he observes.

“We should have to do the study again. I wouldn’t be surprised if the difference were not that big compared with last time,” he exclaims. “In the context of Target2-Securities, they look at the settlement costs and they haven’t declined. You need to ask: how is this possible? Technologies have advanced enormously and we’re still having the same settlement cost as we had 20 years ago, all of us. That is, I think, not normal! And on top of that, we know that in the United States, there is DTCC,  a single depository trust company. Guys, we cannot sit still and do nothing, whereas your main competitor is the US market, having a single settlement entity, while in Europe we have 33 for a much less developed capital market.”

A case for competition authorities, too

To Karel Lannoo, this raises two issues – the first one relating to the laws which have come in place: Have they been properly implemented at all? 

“We wouldn’t be surprised if a study would show that they have not been well implemented – and that local market regulators or central banks have continued to protect their local settlement depositories with a series of arguments, like financial stability arguments or arguments related to, for example, differences in company law and taxation.”

The second aspect is interoperability rules. These, too, he believes could have been better applied.

“This makes it an issue of implementation not only by the market regulatory authorities, but also by the competition authorities. In the domains of telecoms, we have gone after monopolies to say ‘look, you have to open up the market to foreign competition’. In the domain of clearing and settlement entities, we have certainly not done this – and there is limited interoperability. 

Incumbents happy with status quo

Karel Lannoo perceives that public discussion on the matter is lacking completely, and he has his theory of why. 

“It is called the ‘plumbing’ of the financial market; it seems to be a boring aspect of it. That is why not many people are interested in it and you can only find a handful of academics who worked on this,” he says as a first point. 

As for the industry players, however, he sees strategic reasons for them not to rock their profitable boats. He puts himself in their situation:  

“‘I keep my little turf for myself, and as long as the other ones don’t do anything, I won’t do anything either. And I will keep quiet because I have my little franchise and I will keep it this way. I will not start complaining because that could do more harm to myself than to my competitor.’ So everybody has withdrawn to their trenches, trying to protect their own markets, with the effect that today we have a European capital market that remains very disintegrated.”

“Why should you have one supervisor to supervise a monopoly in one member state? That doesn’t make any sense.”

But wouldn’t Europe’s large trading actors be able to raise their voices – being large-volume buyers of the settlement services?

“Some people in the banking sector raise it from time to time. For example, they have done it towards exchanges, which are mostly the owners also of the settlement entities. ‘Exchange, look, your data are far too expensive.’ But most of them are basically in collusion with each other where they prefer to keep it quiet because both of them earn well from this – and the end user is paying the cost.”

Supervision too fragmented

Europe’s regulatory supervision – performed by each member state rather than a central authority – is a badly contributing factor, Karel Lannoo strongly suspects. Centralisation is due, even if it would require “breaking some eggs”, he has argued

“Why should you have one supervisor to supervise a monopoly in one member state? That doesn’t make any sense. You should have one European supervisor of CSDs to see whether they have applied CSDR correctly, and in a similar way. Then you look at 33 CSDs, neutral with regard to whether you’re supervising the German, the French or the Italian CSD. And in addition, you will have a more efficient supervision if you do it for 33 than if you do it for one alone.”