Evolution of European market infrastructure & Options for integration/cooperation among market infrastructures Froukelien Wendt Sr. Financial Sector Specialist The World Bank December 14, 2011

A range of EU initiatives impacts European market infrastructures Trading platformsCCPsCSDs 1999/2000: 2001/2003: 2006: 2007: 2009: 2012 and further: FSAP / Lisbon Agenda Giovannini reports Code of Conduct MiFID ESCB-CESR Recommendations MiFID2 & MiFIREMIRSLD Target2Securities Legislation CSDs 2

The MiFID aims to create one single capital market in the EU through competition between market infrastructures MiFID Objective: 1.Enhance competition in the single market, 2.Harmonize level playing field for the industry across member states, and 3.Protect investors (especially retail) MiFID Pillars: Pillar I: single passport for investment firms Pillar II: free competition between trading platforms and best execution rule Pillar III: powers of securities market regulators and cross-border cooperation MiFID and post-trade infrastructure: art 35 and 46 contain access provisions, which basically enable the regulated market and MTF to gain access to the CCP and CSD of its choice. 3

The MiFID has strongly impacted market infrastructures, investment firms and their regulators Increased supervisory role in local market and across borders The regulators Increased supervision of members Competition from European trading venues Stricter fit and proper requirements for managers & shareholders National exchanges Passport provision and increased foreign competition Stricter fit and proper requirements More complex best execution rule Stricter capital & organizational requirements Investment firms CSDs to handle access requests from other EU RMs and MTFs Harmonization of post-trading infrastructure with Europe CCPs and CSDs 4

Impact of EU initiatives differs between Western Europe and Central and Eastern Europe Western EuropeCentral and Eastern Europe Situation in 2006: Profit margin market infrastructures HighLow Market liquidity HighLow Cross-border trading IncreasingLimited Impact since 2006: MTFs Many MTFs created Some MTFs high market share Few MTFs Stock Exchanges Mergers and alliances Loss of market share Some alliances CCPs Some new CCPs created Mergers and alliances Loss of market share to MTFs Few CCPs and limited cooperation CSDs Mergers and alliancesFew alliances Prices and cost of market infrastructures Significant overall decreaseNo significant impact Cross-border trading MTFs offer access to range of Pan- European equities Few shares are tradable on new MTFs (e.g. from Austria) Regulators Increased cooperation Increased number of MoUs Increased cooperation 5

Competition between trading platforms in Western Europe affects national monopolistic structures Source: LSE Group down from 28% to 21% Central and Eastern European exchanges equal at 1% Deutsche Börse down from 17% to 12% NYSE Euronext down from 22% to 16% Other platforms down from 26% to 22% MTF CHI-X up from 5% to 19% MTF BATS Europe up from 0% to 6% MTF Turquoise up from 1% to 3% Market shares of trading platforms in European equities changed significantly since

Competition has caused significant decreases in prices and costs of market infrastructures Trading platformsCCPsCSDs Note: for trading platforms, the cost per on-book trading transaction is shown; for CCPs, the cost pr central counterparty clearing transaction is shown; and for CSDs, the cost per clearing and settlement transaction is shown. Changes in the costs of account provision and asset servicing are not presented here. Source: Oxera, ‘Monitoring prices, costs and volumes of trading and post-trading services’, May 2011 Change in the costs per transaction of using trading platforms (equities), CCPs (equities) and CSDs (equities and fixed income securities), Majority of trading platforms, CCPs and CSDs decreased their prices and costs, sometimes more than 80% 7

In Western Europe trading platforms, CCPs and CSDs are merging across borders 8

New cross-border market structures have been established for trading and clearing of European large caps and midcaps 9

Central and Eastern European market infrastructures are potentially exposed to the same market forces as Western Europe StrategiesKey questions Status quo / organic growth Critical mass to ensure liquidity and market depth? Attractive to listed firms and potential listings? Attractive to domestic and foreign investors? Profitable solution on the long term? Cross listing large caps on European exchange/MTF? Regional integration and cooperation Will regional cooperation have critical mass and improve the attractiveness of the local market ? Which alliance partners? What model for trading, clearing and settlement? Cross listing large caps on European exchange/MTF? Alliance European/global exchange or MTF Full integration or only on specific areas? Solution for the small and mid caps? Which alliance partners? What model for trading, clearing and settlement? 10

Regional stock market integration in Central and Eastern Europe has potential, but is dependent on economic growth 11 Source: World Bank

The market infrastructure can be modeled according to the NASDAQOMX and CEESEG market infrastructures Features:  Joint strategy  Harmonized rules  Harmonized listing requirements  Cross-membership  Single trading platform  Single clearing platform  Joint indices  Joint trade data packages  Joint promotional activities Government and corporate securities Settlement securities leg Clearing Listing Settlement cash leg CSD Stock exchange DVP Stock exchange Trading Common Trading System CSD TARGET2 / National Central Bank Common Clearing System DVP Stock exchange CSD DVP 12

Conclusions A new market infrastructure model needed in many EU10 countries EU initiatives support competition and thus request competitive market infrastructure models Goal should be to offer firms and investors deep and liquid markets A well-functioning market infrastructure alone does not guarantee deep and liquid markets; broad investor base and large range of solid firms are essential. Integration may offer the necessary critical mass and thus important benefits for firms and investors Integration should be beneficial for large, mid and small caps Coordination of these choices among regional policy makers is essential for success! 13