## _wp06241

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---

### I. INTRODUCTION
- Objective:
  - Assess whether the current regulatory setting is adequate to deal effectively with the risks associated with cross-border securities infrastructure integration and, in particular, cross-border mergers and alliances.
- Scope limitations:
  - Focus mainly on post-trading—securities clearinghouses, securities settlement systems, and custody—and covers trading facilities only for the sake of completeness.
  - Does not explicitly deal with competition and barriers to entry; instead focuses on financial stability.
- Organization of the paper:
  - Section II: describes the important components of the securities market infrastructure.
  - Section III: analyzes the main economic features of the post-trading infrastructure as a potential explanation for cross-border integration.
  - Section IV: describes the various models of integration that have emerged in Europe.
  - Section V: discusses the specific risks related to cross-border integration.
  - Section VI: examines the response of the public authorities and assesses its adequacy.
  - Section VII: explores an alternative regulatory and supervisory setting.
- Terminology note:
  - “In this paper, the term ‘regulatory’ covers securities regulation, prudential supervision, and central banks’ oversight.”

### II. MAIN COMPONENTS OF SECURITIES MARKET INFRASTRUCTURE
- Overarching principle:
  - Smooth functioning and confidence in securities markets depend on the efficiency and reliability of infrastructure; crucial that transfer of ownership from seller to buyer in exchange for payment takes place in a safe and efficient manner.
- Value chain overview:
  - A securities transaction encompasses trading, clearing, settlement, and custody; these components are complementary and occur in an orderly manner for a typical securities transaction.
- Post-trade sequence and functions:
  - Matching:
    - Confirms agreement on type of securities, price, volume, payment, settlement date, and counterparty after execution.
    - Typically carried out by a stock exchange; matching can also be internalized within broker/dealer firms.
  - Clearing:
    - Computes obligations of counterparties resulting from matching.
    - Clearing can be on a gross basis (trade for trade) or on a net basis (offsetting of mutual obligations).
    - Netting modalities:
      - Bilateral netting: arrangement between only two parties.
      - Multilateral netting: summing each participant’s bilateral net positions to arrive at a multilateral net position.
    - When netting is used, functionality could be offered by either a settlement system (settlement netting) or a central counterparty (CCP) clearing (contractual netting).
      - Settlement netting:
        - Does not normally have any legal impact on underlying contracts; counterparties remain legally bound.
        - Obligations stemming from all individual contracts are fulfilled if, and only if, the netting procedure of all transactions in a settlement batch is finalized.
        - Obligations are netted by the settlement system on a multilateral basis.
      - Contractual netting (CCP novation):
        - All underlying contracts are “novated” to a single replacement contractual obligation vis-à-vis a CCP.
        - The CCP interposes itself between buyer and seller and assumes respective rights and obligations.

### Box 1 — Settlement process and custody
- Settlement process:
  - Settlement aims to discharge obligations through delivery of securities from seller to buyer and payment from buyer to seller.
  - Function provided by a securities settlement system (SSS).
  - Cash-side settlement can occur in:
    - central bank money, or
    - commercial bank money provided by an agent bank and/or by the settlement system.
  - Almost all settlement systems are operated and governed by central securities depositories (CSDs).
  - Settlement forms:
    - delivery versus payment (normally, but not always),
    - free of payment (delivery without funds transfer),
    - delivery versus delivery (one category of securities against another),
    - internalized settlement at a custodian bank when both counterparties have accounts with the same custodian (executed in the custodian’s books without affecting the CSD books).
- Custody and safekeeping:
  - Custody includes issuance of securities in certificated, immobilized, or dematerialized forms (created and registered exclusively in book-entry form).
  - Permits transfer of securities holdings through book entry (registration on account).
  - Related services: corporate events (income payments, redemptions, stock splits, capital increases), proxy voting, tax reclaim, reporting.
  - Typical providers:
    - In the majority of European countries, CSDs where securities are issued provide custody.
    - Issuers may appoint separate entities for issuance and corporate events.
    - Some custodian banks provide similar services for internationally issued securities.
    - Custodian banks often act as intermediaries between local CSDs and brokers/dealers/end-investors.
    - In Nordic countries, the United Kingdom, and Greece, retail and end-investors can have accounts directly at the CSD.

### Main economic features of the clearing and settlement industry
- Network externalities:
  - Value of services to an investor depends on the number of investors using the same services; more participants allow clearing and settling within a single system without relying on other systems or intermediaries.
- Economies of scale:
  - Average cost per transaction diminishes as the number of transactions increases.
  - IT infrastructure has relatively high fixed costs; horizontal integration into a single database engine is more cost-efficient than multiple engines for a single local market.
  - Footnote: "However, the impact of economies of scale might be relatively low for a global system, due to the relatively high cost associated with the complexity of such a system."
- Vertical complementarities and economies of scope:
  - Matching and clearing must occur before settlement; vertical integration can yield efficiency gains and reduce interfaces and procedures.
- Incompatibility and switching costs:
  - Use of a particular system requires large investments in human capital and IT infrastructure; switching systems is costly and burdens small and medium-size users disproportionately.
- Historical regulatory outcome:
  - Perception of a natural monopoly led many European countries to legal monopolies and direct state ownership; 1990s reforms led to demutualization and corporatization with many systems becoming private-owned monopolies.

### Integration of securities market infrastructure in Europe — drivers and models
- Drivers of change:
  - Growing globalization and integration, liberalization of national capital markets, technological progress, telecommunications advances, and the euro eliminating currency segmentation and increasing market homogeneity.
  - Institutional investors demanded immediate access to accurate information and streamlined transaction execution.
  - Operational costs escalated across access, connectivity, processing, collateralization and margining, liquidity pooling, accounting, and reconciliation.
  - Outsourcing of back-office and middle-office operations to regional and global custodians became common.
- Changing roles and competition:
  - Custodian banks expanded in-house clearing and settlement capacity; groups of savings/cooperative banks set up common entities for securities processing.
  - Legal monopolies for CSDs and CCPs were abolished in almost all European countries, but local CSDs and CCPs often remain de facto local monopolists.
  - CSDs increasingly compete with custodian banks by offering collateral and risk management, securities lending, and cross-border services.
- Two models of cross-border integration:
  - Interlink model:
    - Technically connected national clearinghouses and SSSs enabling cross-border transfer of securities and cash; national system acts as "nominee" when securities are transferred to a foreign national system.
    - Requires minimum harmonization of business practices and technical procedures (settlement procedures, handling settlement failures, cut-off times, operating hours).
    - Many European systems are linked resulting in hundreds of links ("Spaghetti model").
    - Criticisms and indicators:
      - Has not delivered anticipated cost reductions and settlement efficiency for cross-border transactions.
      - Cost of securities clearing and settlement of cross-border transactions in Europe is "between two and three times higher than in the United States."
      - Links have limited use for cross-border transfers of value-added services; cumbersome procedures hinder transfer of value-added services.
      - Securities transferred via cross-border links accounted only for "15 percent" of total cross-border transfers of securities used as collateral for central banks’ credit in 2005.
      - Major part of cross-border collateral is provided through the correspondent central banking model (CCBM).
  - Consolidation model:
    - Mergers and alliances reduce number of systems; can be horizontal or vertical.
    - Four stages observed:
      - Stage 1: Horizontal consolidation within domestic markets (mergers among stock exchanges and/or settlement systems).
      - Stage 2: Vertical consolidation at national level (merger of stock exchange, clearinghouse, and SSS into an infrastructure silo).
      - Stage 3: Cross-border horizontal consolidation (examples cited: Euronext; Euroclear Bank consolidation; Clearstream International; LCH.Clearnet).
      - Stage 4: Creation of "marketplaces" across national borders covering the entire securities transaction chain (example cited: merger of OMX and HIX and related clearing/settlement systems).
- Less market-driven consolidation and political economy factors:
  - Cross-border consolidation has mostly occurred at ownership level via holding companies; local entities often continue to serve domestic markets, limiting realized cost savings and sometimes adding administrative costs.
  - National policymakers often resist closure of national systems for reasons including maintaining national CSDs and protecting domestic markets and local custodian banks.
  - Legal frameworks governing national securities issuance and immobilization/dematerialization are argued to require national CSD custody for legal certainty.
  - Supranational actors (ECB, EC) encouraged consolidation but faced subsidiarity and decentralization concerns:
    - ECB policy statement (July 2006): Governing Council decided to explore possibility of setting up a securities settlement service for securities transactions in central bank money, processing securities and cash settlements on a single platform through common procedures, to be connected or integrated with TARGET2.
    - EC requested industry commitment to a code of practice to improve price transparency, rights of access on a fair, transparent, and nondiscriminatory basis, separate accounting, and price unbundling of main services and activities.
  - Further cross-border consolidation raises challenges for securities regulators and central banks regarding orderly function of national markets and financial stability.

### Main risks of post-trading activities and cross-border implications
- Systemic and operational risks:
  - Malfunction or system failure can prevent timely settlement or access to intraday liquidity, producing systemic disturbance.
  - Clearing and settlement systems can transmit shocks quickly across domestic and international financial systems.
- Specific risk types:
  - Principal risk: counterparty delivers security or cash but does not receive the counter value.
  - Liquidity risk: need to borrow securities when not received when due.
  - Operational failure: delayed settlement with negative financial consequences.
  - Legal risk: uncertainty in enforcement causing financial losses.
  - Custody risk: delays in access to securities or loss due to insolvency or technical problems.
- Cross-border specific risks:
  - Risk concentration: consolidation into single or few systems increases systemic importance and potential cross-country fallout from failures.
  - Legal risks: multiple jurisdictions magnify complexities around transfer of ownership, finality, enforcement of collateral, conflict of laws, and protection of customer assets.
  - Operational risks: links increase complexity; special reconciliation procedures and contingency handling are required for communication and matching failures.
  - Financial risk: pooled or redistributed liquidity across systems increases interdependency and potential contagion.
  - Cross-market and cross-currency clearing risk: CCPs concentrating credit risk can transmit distress across markets and currencies.

### Regulatory and supervisory response — objectives and central bank interests
- Public objectives:
  - Ensure design and operations of infrastructure are sound, safe, and efficient.
  - Promote efficiency and competition to reduce transaction costs.
  - Within EU context: foster integrated securities market infrastructure so EU investors face similar costs and conditions for domestic and European-wide transactions.
  - Trade-off: single CCP yields benefits but concentrates risks and complicates multi-jurisdictional regulation.
- Central banks’ specific interests:
  - Securities settlement systems are critical to monetary policy implementation, financial stability, and payment systems functioning.
  - Central bank intraday credit and collateral usage depend on timely delivery of collateral via settlement systems.
  - Delivery-versus-payments (DVP) mechanisms limit settlement risks but can transmit settlement difficulties into payment systems and create RTGS liquidity gridlocks.
  - Cross-border collateral raises legal and operational risks due to conflicting legal environments and enforcement complexities.
  - Central banks favor cash leg settlement in central bank money to contain systemic risk; concern when ICSDs settle cash on their own books.

### Institutional setting, effectiveness, and identified deficiencies
- Current arrangements:
  - Shared responsibilities among securities regulators, central banks, and sometimes banking supervisors.
  - Home country principle applied: lead authority is the home country authority where the consolidated system is legally located, responsible for coordinating with other relevant authorities.
  - Horizontal cooperation (CESR, ESCB) and vertical cooperation (ESCB-CESR Committee) are in place.
  - Memoranda of understanding (MOUs) used in cases like Euroclear Group consolidation to set principles for information sharing and crisis procedures.
- Identified weaknesses:
  - Lack of an adequate legal basis: MOUs are voluntary and not legally enforceable.
  - Lack of common understanding: national authorities may assess risk and efficiency differently, delaying or hindering coordinated responses.
  - Risk of regulatory deficiency: multiple authorities need intensive coordination and resources which may be lacking.
  - Conflicting interests: national objectives may conflict with supranational ambitions, complicating the home country principle’s effectiveness for cross-border systems.

### Proposed alternative: a two-tier regulatory and oversight framework
- Core proposal:
  - Create a centralized "federal" European regulatory framework for regional systems, alongside the current national regulatory framework for domestic systems.
- Institutional arrangements and roles:
  - EC: propose and ensure implementation of common European legislation.
  - CESR: improve coordination among securities regulators, ensure consistent implementation, advise EC on implementing measures.
  - ECB: safeguard stability of financial markets and ensure smooth functioning of payment and settlement systems.
  - Suggestion for a supranational "federal" body jointly enacted by CESR and ESCB to regulate European securities clearing and settlement systems, with exclusive mandate to define and enforce regulation, perform assessment, onsite supervision, and oversight.
  - Central body governance should include independent directors and legally enforceable mandate across jurisdictions.
  - National central banks and securities regulators would implement policies and operate under central body's authority.
- Supervisory and oversight arrangements by system type:
  - Local systems:
    - Supervised by national securities regulators and central bank; central CESR/ESCB body defines policy and issues rules/recommendations for harmonization.
  - Regional or European-wide systems:
    - High cross-country systemic importance argues for centralized regulation, supervision, and oversight by the central CESR/ESCB body with exclusive mandate for rules, monitoring, assessment, and onsite inspection.
    - Central body may delegate operational implementation to national authorities but must define mandates and responsibilities.
  - Cross-border linked systems:
    - Current cooperative framework considered adequate but should be placed under auspices of the central CESR/ESCB body; central body defines policy and reviews assessments while national regulators and central banks perform operational supervision/oversight.

*Source: _wp06241 - Box 1: A Typical Value Chain of a Securities Transaction*

### 1. A Typical Value Chain of a Securities Transaction.......................................................4

### 1. A Typical Value Chain of a Securities Transaction.......................................................4

### I. INTRODUCTION
- Financial market deregulation and the introduction of the euro have accelerated the integration of the securities market infrastructure in Europe.
- Policymakers have undertaken several initiatives and measures to promote further integration.
- The paper’s main objective: assess whether the current regulatory setting is adequate to deal effectively with the risks associated with cross-border securities infrastructure integration and, in particular, cross-border mergers and alliances.
- Scope limitations:
  - Focus mainly on post-trading—securities clearinghouses, securities settlement systems, and custody—and covers trading facilities only for the sake of completeness.
  - Does not explicitly deal with competition and barriers to entry; instead focuses on financial stability.
- Organization of the paper:
  - Section II: describes the important components of the securities market infrastructure.
  - Section III: analyzes the main economic features of the post-trading infrastructure as a potential explanation for cross-border integration.
  - Section IV: describes the various models of integration that have emerged in Europe.
  - Section V: discusses the specific risks related to cross-border integration.
  - Section VI: examines the response of the public authorities and assesses its adequacy.
  - Section VII: explores an alternative regulatory and supervisory setting.
- Note on terminology:
  - Footnote: “In this paper, the term ‘regulatory’ covers securities regulation, prudential supervision, and central banks’ oversight.”

### II. MAIN COMPONENTS OF SECURITIES MARKET INFRASTRUCTURE
- Overarching principle:
  - The smooth functioning of and confidence in the securities market depend on the efficiency and reliability of its infrastructure.
  - Crucial that the transfer of ownership from the seller to the buyer in exchange for payment takes place in a safe and efficient manner.
- Value chain overview:
  - A securities transaction encompasses trading, clearing, settlement, and custody; these components are complementary and occur in an orderly manner for a typical securities transaction.
- Post-trade sequence and functions:
  - Matching
    - After a trade has been executed, the matching process confirms the agreement of the parties on the terms and conditions of a trade: type of securities, price, volume, payment, settlement date, and counterparty.
    - Typically carried out by a stock exchange.
    - Trading can also be carried out over-the-counter or internalized within the broker/dealer; in that case matching occurs internally within the firm.
  - Clearing
    - Clearing computes the obligations of the counterparties resulting from the matching process.
    - Clearing can be on a gross basis (trade for trade) or on a net basis (offsetting of mutual obligations).
    - Netting modalities:
      - Bilateral netting: arrangement between only two parties to net their bilateral obligations.
      - Multilateral netting: arithmetically achieved by summing each participant’s bilateral net positions with those of the other participants to arrive at a multilateral net position vis-à-vis all other participants.
    - When netting is used, functionality could be offered by either a settlement system (settlement netting) or a central counterparty (CCP) clearing (contractual netting).
      - Settlement netting:
        - Does not normally have any legal impact on the underlying contracts.
        - Counterparties that have conducted a trade remain legally bound.
        - Obligations stemming from all individual contracts are fulfilled if, and only if, the netting procedure of all the transactions including a particular settlement batch is finalized.
        - Obligations of the counterparties are netted by the settlement system on a multilateral basis.
      - Contractual netting (CCP novation):
        - All underlying contracts are “novated” to a single replacement contractual obligation vis-à-vis a CCP.
        - The CCP interposes itself between the buyer and seller and assumes their respective rights and obligations.

*Source: _wp06241 - 1. A Typical Value Chain of a Securities Transaction.......................................................4*

### Box 1: A Typical Value Chain of a Securities Transaction

### Box 1: A Typical Value Chain of a Securities Transaction

### Settlement process
- Settlement aims to discharge obligations through delivery of securities from the seller to the buyer and payment from the buyer to the seller.
- Function provided by a securities settlement system (SSS).
- Cash-side settlement can occur in:
  - central bank money, or
  - commercial bank money provided by an agent bank and/or by the settlement system.
- Almost all settlement systems are operated and governed by central securities depositories (CSDs).
- Settlement forms:
  - delivery versus payment (normally, but not always),
  - free of payment (delivery without funds transfer),
  - delivery versus delivery (one category of securities against another),
  - internalized settlement at a custodian bank when both counterparties have accounts with the same custodian (executed in the custodian’s books without affecting the CSD books).

### Custody and safekeeping
- Custody includes issuance of securities in certificated, immobilized, or dematerialized forms (created and registered exclusively in book-entry form).
- Permits transfer of securities holdings through book entry (registration on account).
- Related services provided by custody:
  - corporate events (income payments, redemptions, stock splits, capital increases),
  - proxy voting,
  - tax reclaim,
  - reporting.
- Typical providers:
  - In the majority of European countries, CSDs where securities are issued provide custody.
  - Issuers may appoint separate entities for issuance and corporate events.
  - Some custodian banks provide similar services for internationally issued securities.
  - Custodian banks often act as intermediaries between local CSDs and brokers/dealers/end-investors.
  - In Nordic countries, the United Kingdom, and Greece, retail and end-investors can have accounts directly at the CSD.

### Main economic features of the clearing and settlement industry
- Network externalities:
  - Value of services to an investor depends on the number of investors using the same services.
  - More participants allow clearing and settling within a single system without relying on other systems or intermediaries.
- Economies of scale:
  - Average cost per transaction diminishes as the number of transactions increases.
  - IT infrastructure (database engine, networks, interfaces) has relatively high fixed costs.
  - Horizontal integration into a single database engine is more cost-efficient than multiple engines for a single local market.
  - Footnote: "However, the impact of economies of scale might be relatively low for a global system, due to the relatively high cost associated with the complexity of such a system."
- Vertical complementarities and economies of scope:
  - Matching and clearing must occur before settlement.
  - Vertical integration along the value chain can yield efficiency gains from joint operation of complementary components.
  - Single supplier can provide a package of services at lower cost and reduce multiple interfaces and procedures for participants.
- Incompatibility and switching costs:
  - Use of a particular system requires large investments in human capital and IT infrastructure.
  - Switching systems is costly due to relation-specific investments; relatively higher burden for small and medium-size users.
- Historical regulatory outcome:
  - These features led to perception of a natural monopoly; many European countries enforced legal monopolies of post-trading infrastructure and, in many cases, direct state ownership.
  - During the 1990s, regulatory reforms led to demutualization and corporatization; many systems moved from public-owned monopolies to private-owned monopolies with profit maximization objectives.

### Integration of securities market infrastructure in Europe — drivers and models
- Drivers of change:
  - Growing globalization and integration of securities markets, liberalization of national capital markets, technological progress, telecommunications advances.
  - The euro eliminated currency segmentation and increased market homogeneity, shifting investors toward European-wide patterns and boosting cross-border transactions.
  - Institutional investors demanded immediate access to accurate information and streamlined transaction execution.
  - Operational costs escalated for institutional investors across access, connectivity, processing, collateralization and margining, liquidity pooling, accounting, and reconciliation.
  - Outsourcing of back-office and middle-office operations to regional and global custodians became common to replace fixed costs with activity-dependent flexible costs.
- Changing roles and competition:
  - Custodian banks expanded in-house clearing and settlement capacity, sometimes creating separate legal entities to insource middle- and back-office activities.
  - Groups of savings/cooperative banks set up common entities for securities processing.
  - Legal monopolies for CSDs and CCPs were abolished in almost all European countries, but local CSDs and CCPs often remain de facto local monopolists due to barriers.
  - CSDs increasingly compete with custodian banks by offering collateral and risk management, securities lending, and cross-border services.

- Two models of cross-border integration:
  1. Interlink model:
     - Technically connected national clearinghouses and SSSs enabling cross-border transfer of securities and cash.
     - National system acts as "nominee" when securities are transferred to a foreign national system.
     - Requires minimum harmonization of business practices and technical procedures (settlement procedures, handling settlement failures, cut-off times, operating hours).
     - Many European systems are linked resulting in hundreds of links ("Spaghetti model").
     - Criticisms:
       - Has not delivered anticipated cost reductions and settlement efficiency for cross-border transactions.
       - Cost of securities clearing and settlement of cross-border transactions in Europe is "between two and three times higher than in the United States."
       - Links have limited use for cross-border transfers of value-added services; cumbersome procedures hinder transfer of value-added services.
       - Indicator: securities transferred via cross-border links accounted only for "15 percent" of total cross-border transfers of securities used as collateral for central banks’ credit in 2005.
       - Major part of cross-border collateral is provided through the correspondent central banking model (CCBM).
  2. Consolidation model:
     - Mergers and alliances reduce number of systems; can be horizontal (same-level services) or vertical (complementary services along the value chain).
     - Four stages observed:
       - Stage 1: Horizontal consolidation within domestic markets (mergers among stock exchanges and/or settlement systems).
       - Stage 2: Vertical consolidation at national level (merger of stock exchange, clearinghouse, and SSS into an infrastructure silo).
       - Stage 3: Cross-border horizontal consolidation (e.g., Euronext; Euroclear Bank consolidation; Clearstream International; LCH.Clearnet).
       - Stage 4: Creation of "marketplaces" across national borders covering the entire securities transaction chain (e.g., merger of OMX and HIX and related clearing/settlement systems).

### Less market-driven consolidation and political economy factors
- Cross-border consolidation has mostly occurred at ownership level via holding companies; local entities often continue to serve domestic markets, limiting realized cost savings and sometimes adding administrative costs.
- National policymakers often resist closure of national systems for reasons including:
  - Desire to maintain national CSDs and protect domestic markets and local custodian banks.
  - Legal frameworks governing national securities issuance and immobilization/dematerialization argued to require national CSD custody for legal certainty.
- Supranational actors (ECB, EC) have encouraged consolidation but faced subsidiarity and decentralization concerns:
  - ECB policy statement (July 2006): Governing Council decided to explore possibility of setting up a securities settlement service for securities transactions in central bank money, processing securities and cash settlements on a single platform through common procedures, to be connected or integrated with TARGET2.
  - EC requested industry commitment to a code of practice to improve price transparency, rights of access on a fair, transparent, and nondiscriminatory basis, separate accounting, and price unbundling of main services and activities.
- Further cross-border consolidation raises challenges for securities regulators and central banks regarding orderly function of national markets and financial stability.

### Main risks of post-trading activities and cross-border implications
- Systemic and operational risks:
  - Malfunction or system failure can produce systemic disturbance by preventing timely settlement or access to intraday liquidity.
  - Clearing and settlement systems can transmit shocks quickly across domestic and international financial systems.
- Principal risk, liquidity risk, operational failures, legal risk, and custody risk are highlighted:
  - Principal risk: counterparty delivers security or cash but does not receive the counter value.
  - Liquidity risk: need to borrow securities when not received when due.
  - Operational failure: delayed settlement with negative financial consequences.
  - Legal risk: uncertainty in enforcement causing financial losses.
  - Custody risk: delays in access to securities or loss due to insolvency or technical problems.
- Specific risks of cross-border activities:
  - Risk concentration: consolidation into single or few systems increases systemic importance and potential cross-country fallout from failures.
  - Legal risks: multiple jurisdictions magnify complexities around transfer of ownership, finality, enforcement of collateral, conflict of laws, and protection of customer assets.
  - Operational risks: links increase complexity; requires special reconciliation procedures and contingency handling for communication and matching failures.
  - Financial risk: pooled or redistributed liquidity across systems increases interdependency and potential contagion.
  - Cross-market and cross-currency clearing risk: CCPs concentrating credit risk can transmit distress across markets and currencies.

### Regulatory and supervisory response — objectives and central bank interests
- Public objectives:
  - Ensure design and operations of infrastructure are sound, safe, and efficient.
  - Promote efficiency and competition to reduce transaction costs.
  - Within EU context: foster integrated securities market infrastructure so EU investors face similar costs and conditions for domestic and European-wide transactions.
  - Trade-off exists between safety and efficiency (e.g., single CCP yields benefits but concentrates risks and complicates multi-jurisdictional regulation).
- Central banks’ specific interests:
  - Securities settlement systems are critical to monetary policy implementation, financial stability, and payment systems functioning.
  - Central bank intraday credit and collateral usage depend on timely delivery of collateral via settlement systems.
  - Delivery-versus-payments (DVP) mechanisms limit settlement risks but can transmit settlement difficulties into payment systems and create RTGS liquidity gridlocks.
  - Cross-border collateral raises legal and operational risks due to conflicting legal environments and enforcement complexities.
  - Central banks favor cash leg settlement in central bank money to contain systemic risk; concern when ICSDs settle cash on their own books.

### Institutional setting, effectiveness, and identified deficiencies
- Shared responsibilities among securities regulators, central banks, and sometimes banking supervisors.
- Home country principle applied: lead authority is the home country authority where consolidated system is legally located, responsible for coordinating with other relevant authorities.
- Horizontal cooperation (CESR, ESCB) and vertical cooperation (ESCB-CESR Committee) are in place.
- Memoranda of understanding (MOUs) have been used in cases like Euroclear Group consolidation to set principles for information sharing and crisis procedures.
- Identified weaknesses of current decentralized framework:
  - Lack of an adequate legal basis: MOUs are voluntary and not legally enforceable.
  - Lack of common understanding: national authorities may assess risk and efficiency differently, delaying or hindering coordinated responses.
  - Risk of regulatory deficiency: multiple authorities need intensive coordination and resources which may be lacking.
  - Conflicting interests: national objectives may conflict with supranational ambitions, complicating the home country principle’s effectiveness for cross-border systems.

### Proposed alternative: a two-tier regulatory and oversight framework
- Proposal: create a centralized "federal" European regulatory framework for regional systems, alongside current national regulatory framework for domestic systems.
- Institutional arrangements:
  - Roles of existing bodies:
    - EC: propose and ensure implementation of common European legislation.
    - CESR: improve coordination among securities regulators, ensure consistent implementation, advise EC on implementing measures.
    - ECB: safeguard stability of financial markets and ensure smooth functioning of payment and settlement systems.
  - Suggestion for a supranational "federal" body jointly enacted by CESR and ESCB to regulate European securities clearing and settlement systems, with exclusive mandate to define and enforce regulation, perform assessment, onsite supervision, and oversight.
  - Central body governance should include independent directors and legally enforceable mandate across jurisdictions.
  - National central banks and securities regulators would implement policies and operate under central body's authority.
- Supervisory and oversight arrangements by system type:
  - Local systems: supervised by national securities regulators and central bank; central CESR/ESCB body defines policy and issues rules/recommendations for harmonization.
  - Regional or European-wide systems:
    - High cross-country systemic importance argues for centralized regulation, supervision, and oversight by the central CESR/ESCB body with exclusive mandate for rules, monitoring, assessment, and onsite inspection.
    - Central body may delegate operational implementation to national authorities but must define mandates and responsibilities.
  - Cross-border linked systems:
    - Current cooperative framework is considered adequate but should be placed under auspices of the central CESR/ESCB body; central body defines policy and reviews assessments while national regulators and central banks perform operational supervision/oversight.

*Source: _wp06241 - Box 1: A Typical Value Chain of a Securities Transaction*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp06241.pdf_