LONDON (Reuters) - A panel of European Union lawmakers has overwhelmingly backed a draft law throwing open the settlement of share and bond trades to competition if backed by closer scrutiny and other safeguards.
Settling trades, the final step in any deal in which ownership of a security is transferred to a buyer, relies on a multi-trillion euro system to swap legal title in return for payment.
The system stood up well during the financial crisis and none of the 30 central securities depositories in the EU needed support.
The draft law, approved by the European Parliament’s economic affairs committee in a 37 to 4 vote in Strasbourg, France, seeks to turn a fragmented landscape into a more efficient, better-regulated system to cut cross-border trading costs for investors.
The lawmakers also agreed to open talks with EU states, which have joint say, on a final text that will become law.
Many exchange operators earn handsome profits from depositories. Deutsche Boerse (DB1Gn.DE), for example, owns Clearstream Frankfurt and Clearstream Luxembourg, where it directs most trades from its exchanges.
The draft law sets parameters for competition and accelerates fundamental changes already under way in the sector.
For the first time, it gives authorized settlement houses a pan-EU “passport” to operate across the 27-nation bloc - as long as they are adequately capitalized and comply with safety rules.
Operators like Euroclear and Clearstream in Luxembourg will undergo a far more demanding authorization if they want to keep their banking operations under the same roof as the more straightforward settlement operations.
The law, which will likely take effect in 2014, also harmonizes settlement times to a maximum of two days following the trading day. There would also be penalties on banks and brokers that fail to settle trades on time.
The European Central Bank, in parallel to the EU reform, is setting up a one-stop shop securities settlement platform for the euro zone to slash trading fees and help rationalize the number of settlement houses.
Reporting by Huw Jones