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A revolution in the making - International Custody Markets Guide

A revolution in the making

2007 is a pivotal year for European financial markets. Two landmark projects reach fruition, and with them, the twin goals of achieving greater harmonisation and competition in European markets take a major step forward.

First, there is the Markets in Financial Services Directive, which will enter into force on 1 November. Talk about MiFID often focuses on the costs of implementation. Essentially however, it provides for a much-needed upgrade of Europe's trading environment in light of new technologies, investment instruments and market entrants.

Its central themes - the abolition of the concentration rule, and the single EU-wide passport for investment service providers - are truly revolutionary; all the more so since they come at a time of general political deadlock at the EU level.

Second, there is the Code of Conduct for Clearing and Settlement, agreed upon by industry members in October 2006. The timetable is ambitious: price transparency by the end of 2006, non-discriminatory access and interoperability by July 2007, and price and services unbundling by January 1 2008.

The Code of Conduct is a welcome development in the sense that it was elaborated by the clearing and settlement industry itself. It sets an interesting precedent for the pragmatic use of soft law instruments in regulating the marketplace. Timely implementation is essential, both from the viewpoint of any future regulation in the field as well as the onset of MiFID.

As the latter increases the number of alternatives to trading on stock exchanges, the clearing and settlement of those transactions is also potentially affected. For example, what channels the MiFID-enabled trading facility set up by the world's seven largest investment banks - Project Turquoise - intends to use remains to be seen.

The EU plan to achieve greater harmonisation and competition is paying off. New business models in securities trading, clearing and settlement will be created as the landscape for banks, stock markets, custodians and central securities depositories presents new opportunities and better inter-connections across Europe.

Against this backdrop, the recent trend in consolidation among stock markets is not surprising. Nor, perhaps, is the European Central Bank's offer to set up a TARGET-2 Securities platform for settling Eurozone transactions. When met with a revolution, it is good that old structures reform and don't simply react.

Piia-Noora Kauppi
Member of the European Parliament, Finland
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