Standard setting and competition in securities settlement

This paper examines the impact of messaging and technical standards on competition in the supply of se-curities transaction management services. Two simple switching cost models are used to clarify the im-pact of standards on barriers to entry and on the incentives to adopt harmonised and simplified securities processing standards. Policy implications are discussed briefly.

Introduction: This paper discusses the role of standard setting as it affects competition in securities settlement, paying particular attention to the implications for the development of pan-European and global arrangements for securities settlement. Standard setting for messages and ‘interoperability’ of securities settlement systems has become a central practitioner issue in the past few years. This has happened for two main reasons. The first is the widespread desire in the industry for greater automation of post-trade processing,achieving as great a degree of ‘straight through processing’ or STP as possible. This goal has been promoted in particular by a recent report of the Group of Thirty on global securities processing (G30, 2003). The second reason is the efforts to remove or reduce the various barriers to a single European market in post-trade securities clearing and settlement, identified by the first report of the Giovannini group (Giovannini, 2002). The second Giovannini report proposed a series of actions to address these barriers (Giovannini Group, 2003). This report gave SWIFT, together with the practitioner network SMPG (Securities Market Practice Group) supported by SWIFT, the role of facilitating an industry wide project for harmonising messaging and inter-operability standards for securities settlement across Europe, thus addressing the first of the fifteen Giovannini barriers to pan-European securities clearing and settlement.

Author: Alistair Milne

Source: Research Discussion Papers, Bank of Finland

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