The CSD will need all instructions input, matched and ready to settle at the latest before the close of payment systems on T+1. This leaves little time for problem resolution if the instructions do not match or are missing, which is not uncommon due to the multiple layers of investors and intermediaries typical of securities markets. EuroCCP's settlement arrangement via our power of attorney model enables us to achieve timely matching of settlement instructions at the CSD. Combined with the high automation of our processes and straight through processing, moving to T+1 is relatively straightforward for us.

T+1 also means less time to arrange for securities and funds to be in place for settlement, which means a high demand (and cost) by market participants for securities borrowing and credit facilities. The consequence could be a significantly higher fail rate, with increased operational costs and risks - especially risks associated with corporate actions processing.

CCP ownership falls into broad categories of:

• User-owned: EuroCCP
• Under the same ownership as an exchange, in a so-called "vertical" model: CC&G, SIX x-clear, Eurex
• User- and exchange-owned: LCH.Clearnet Ltd. and SA
• Commercial entity- and government-owned: EMCF
• Exchange- and central bank-owned: CCP.A

Ownership and governance, like clearing and settlement, are often said in the same breath but are separate issues. For example, user ownership does not necessarily mean user governance, and vice-versa.

“User owned” infrastructures come in several varieties. EuroCCP is the subsidiary of a user-owned company, where each user’s holding is periodically rebalanced to become proportional to its usage of the services. Other CCPs may have user shareholders with non-proportional holdings, i.e. there could be users with a higher interest in the profitability of the company. A CCP could also call itself user-owned, counting trading venue owners (as well as trading firms) as users.

“User governed” is a term which in its tightest definition means the management is ultimately accountable to a board of directors comprised of users. Loosely applied, user governed could mean no more than the existence of user advisory committees without real power of decision.

What concerns CCP users most is the extent to which they have the ability to influence CCP decisions that affect their welfare – such as changes in the CCP’s risk profile affecting their potential financial exposure in the event of default of one or more participants.

What concerns trading venues most is the extent to which they have the ability to influence decisions of the CCP that affect their business – such as introduction of new services and changes that could impact the CCP’s ability to continue servicing the venue to the standard required.

According to a recent report on financial market infrastructure governance, “Governance is about power”: who has it, how and why do they obtain it and exercise it. The report has case studies that illustrate governance at work at several market infrastructures, including Deutsche Börse (parent of Eurex), The Depository Trust & Clearing Corporation (parent of EuroCCP), and LCH.Clearnet. Click Here.

Europe’s problem is that today there are multiple CCPs but limited competition, and different stakeholders have different ambitions. Trading venues’ business interests cause them to choose different CCPs, and incumbent CCPs uncertain of their ability to compete are reluctant to interoperate.

A single CCP achieves economies of scale and lowers the unit cost of production, with benefits accruing to shareholders or users, or both. Provided that the CCP’s governance ensures effective constraints to abuse of dominance, a single CCP could also be user-friendly.

From a risk management point of view, each CCP can perform well whether there are one or many CCPs. However, in the event of a default, separate CCPs might collectively suffer a bigger loss than if all the positions of the defaulter were in a single CCP with risks offset within a single portfolio of open positions.

A trading venue might have good reasons to prefer to give its trade feed to a single CCP. It might look to a CCP in which it has an economic interest as a source of revenue, or prefer the simplicity of a single CCP relationship. It could also refuse access to a competitor’s CCP in order to protect its own business.

Alternatively, a trading venue might choose competitive clearing, for example if it anticipates this could increase its trading volumes, more than offsetting any lost revenues or additional costs. A venue could also introduce competitive clearing in order to prevent a loss in market share to venues that have more attractive clearing arrangements.

From a user’s perspective, there are strong reasons why CCP competition is desirable. Some want to be able to choose the CCP that best fits their business model. Others want to be able to consolidate clearing with fewer CCPs (or one CCP) to gain operational efficiencies, to consolidate risk management and reduce capital requirements. Many users believe that competition is necessary to bring and keep costs down, increase responsiveness, and generally improve service quality.

Even though many users favour competition, there are some who believe that Europe needs a single, pan-European CCP that is user-owned, user-governed, and operated at cost. The challenge is how to implement this vision when there are many CCPs in Europe with a wide variety of ownership and governance structures.

The US equity market operates cheaply and safely with a single, mutually owned and user governed CCP, but this structure evolved over twenty years from 7 competing CCPs - and not without struggle.

In 1976, the Securities Industry Association (SIA) of the US, a predecessor organisation of the Securities Industry and Financial Markets Association (SIFMA), wrote, “[We] became increasingly concerned about the progress of the industry toward an efficient and cost effective … clearance and settlement system. We felt that little or no progress was being made nor would be made in the near future since the interest of the processors seemed to be dominating the interest of the users.” An account of the evolution of the single post-trade infrastructure in the US equity market and its relevance to Europe today can be found on the European Commission’s website.

The Europe of 2010 has a completely different and vastly more varied post-trade landscape. Since the risk management and efficiency objectives should be reached within the existing multi-CCP environment, especially if competition opens up with full interoperability, there seems to be no compelling reason for Europe to try to implement a single CCP. It is entirely possible that there will be some consolidation as interoperability takes hold, but this will likely be a natural evolution of a competitive market rather than an overriding objective.