UPDATE 1-EU mulls radical step to cut share trading costs

(Adds Euroclear comment)

By Huw Jones

BRUSSELS, Aug 22 (Reuters) - European Union companies should be allowed to choose which central depository can issue their shares to help cut the cost of cross-border trading, a top EU advisory group said on Friday.

The bloc's executive, the European Commission, asked a group of experts to come up with recommendations to tear down barriers to share trading and make it cheaper for companies and investors.

Europe's system for clearing and settling share trades, whereby legal ownership is swapped for cash -- is fragmented, bumping up costs for cross-border users.

"The Legal Certainty Group's work will help us to bring down these barriers," EU Internal Market Commissioner Charlie McCreevy said in a statement.

The group's recommendations include a radical move to give issuers a free choice of central securities depository (CSD), which issues shares on their behalf.

Top depositories and settlement houses include Euroclear which operates in Belgium, the Netherlands, France, Britain and Ireland, and Clearstream, part of Deutsche Boerse (DB1Gn.DE).

"I particularly welcome the fact that the group has addressed issues that could prove instrumental in making our post-trading market more competitive," McCreevy said.

The recommendation on CSDs may prove contentious in EU states home to smaller depositories that face being gobbled up as they lack scale to compete on fees.

"If implemented, and it's still a big if, this will most likely promote and speed up the consolidation process among CSDs because if the issuers have a real choice, it is to be expected the biggest CSDs will have a comparative advantage over the smaller ones," a banking industry official said.

"It's reflecting a trend towards a duopoly, one around Euroclear, the other around Clearstream," the official added.

Euroclear hoped the recommendations are implemented soon.

"The Commission's support for issuers to have free choice in selecting their central securities depository is very encouraging in view of post-trade industry consolidation trends," Paul Symons, Euroclear's director and head of public affairs, told Reuters.

Clearstream was unable to comment immediately.

The recommendations are part of a wider EU initiative to make cross-border clearing and settlement of share trades cheaper so that a true single financial services market emerges.

McCreevy will decide on the recommendations by year end.

(Reporting by Huw Jones, editing by Mark John and )