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The Regulation of Cross-Border Clearing and Settlement in the European Union from a Legitimacy Perspective

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Abstract

Post-trading activities such as clearing and settlement (C&S) constitute a central element in the integration of European financial markets. However, unlike other areas of financial services, C&S has received little legislative and regulatory attention and, as a result, important barriers to the cross-border provision of C&S services persist in the European Union. In order to remove some of these barriers, the financial industry created, under the auspices of the European Commission, the European Code of Conduct for Clearing and Settlement, a self-regulatory instrument aimed at achieving a smoother provision of cross-border C&S services. This paper uses the concepts of input/output legitimacy to analyse the Code’s representative nature and effectiveness. It shows that, first, the Code has not received input from all the relevant constituencies potentially affected by C&S, and second, that there are serious threats to future compliance with the Code related to the competitive pressures of European financial markets. The paper also identifies the proposals to regulate C&S facilities at EU level as well as the new European supervision authorities in the financial field as elements which may highly contribute to the input/output legitimacy of cross-border C&S rules in the EU.

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References

  1. Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (MiFID), OJ 2004 L 145/1, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:145:0001:0044:EN:PDF> (accessed 20 July 2011).

  2. The Code is available at: <http://ec.europa.eu/internal_market/financial-markets/docs/code/code_en.pdf> (accessed 20 July 2011).

  3. F. Scharpf, Governing in Europe: Effective and Democratic? (Oxford University Press 1999).

  4. Some studies have pointed to the problems linked to the ECB’s input legitimacy deficits. In this regard, see S. Berman and K. McNamara, ‘Bank on Democracy: Why Central Banks Need Public Oversight’, 78 Foreign Affairs (1999) p. 2. However, recent literature suggests that, in light of the financial crisis, it is the loss of trust in the ECB, and hence the output legitimacy of the institution and its policies, that may become the major legitimacy concern. This view is developed by E. Jones, ‘Output Legitimacy and the Global Financial Crisis: Perceptions Matter’, 47 Journal of Common Market Studies (2009) p. 1085.

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  5. A good example of such a perspective is D. Llewellyn, ‘The Economic Rationale of Financial Regulation’, FSA Occasional Paper Series 1 (1999), available at: <http://www.fsa.gov.uk/pubs/occpapers/OP01.pdf> (accessed 15 January 2012).

  6. At the European level, the term ‘securities’ is basically identified with shares, debt instruments (such as bonds) or instruments in between both concepts (see, for example, Art. 4(1)(18) MiFID). On the distinction between the different securities instruments, see M. Siems, ‘The Foundations of Securities Law’, 20 European Business Law Review (2009) p. 141, passim.

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  7. On the role of CCPs in managing risks associated with securities transactions, see K. Ripatti, ‘Central Counterparty Clearing: Constructing a Framework for Evaluation of Risks and Benefits’, Bank of Finland Research Discussion Papers No. 30/2004, passim, available at: <http://ssrn.com/abstract=787606> (accessed 20 July 2011).

  8. For a clear explanation of C&S functions and processes, see The Giovannini Group, Cross-Border Clearing and Settlement Arrangements in the European Union (2001) (First Giovannini Report), available at: <http://ec.europa.eu/internal_market/financial-markets/docs/clearing/first_giovannini_report_en.pdf> (accessed 20 July 2011), at pp. 4–6. Further explanations on the Giovannini Group Reports are provided in section 2.2 below.

  9. Information on Iberclear is available at: <http://www.iberclear.es/Iberclear/home/home.htm> (accessed 20 July 2011).

  10. Amongst the different reasons it is worth underlining the technological developments in securities trading or the introduction of the euro (in this context, see First Giovannini Report, supra n. 9, at p. 7).

  11. In February 2001, the Lamfalussy Committee, instituted by the ECOFIN, published its Final Report of the Committee of Wise Men on the Regulation of European Securities Markets (Lamfalussy Report) (15 February 2001), available at: <http://ec.europa.eu/internal_market/securities/docs/lamfalussy/wisemen/final-report-wise-men_en.pdf> (accessed 20 July 2011), which proposed several reforms in the EU’s financial regulatory framework. One of the most relevant legislative outputs resulting from Lamfalussy is the MiFID. A thorough explanation of the Lamfalussy architecture is provided by E. Ferran, Building an EU Securities Market (Cambridge University Press 2004), at pp. 58–126; G. Ferrarini, ‘Contract Standards and the Markets in Financial Instruments Directive (MiFID): An Assessment of the Lamfalussy Regulatory Architecture’, 1 European Review of Contract Law (2005) p. 19, passim; and N. Moloney, EC Securities Regulation (Oxford University Press 2008), at pp. 843–897. The Lamfalussy system has recently been enhanced by the creation of the European supervisory authorities in the financial field; in this regard, see N. Moloney, ‘EU Financial Market Regulation after the Global Financial Crisis: “More Europe” or more Risks?’, 47 Common Market Law Review (2010) p. 1317, at p. 1332.

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  12. Other non-legal/regulatory variables, such as financial stability, also affect the provision of cross-border financial services within the EU. The Commission indeed found a relationship between the 2007–2010 financial crisis and a retrenchment of capital flows: see the Commission Staff Working Paper, ‘European Financial Stability and Integration Report 2010’ (8 April 2011), available at: <http://ec.europa.eu/internal_market/economic_analysis/docs/financial_integration_reports/20110412-efsir_en.pdf> (accessed 15 January 2012), at pp. 6, 13, 22 and 25.

  13. In 2005, within the context of the political discussion on this issue, the European Parliament identified the ‘inconsistencies between national laws on transferring financial instruments’ as one of the main reasons explaining the higher costs associated to cross-border transactions, and supported the harmonising efforts aimed at removing such barriers, although it also recognised the complexity of this task. In this regard, see ‘Report on Clearing and Settlement in the European Union’, A6-0180/2005 (6 June 2005), available at: <http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A6-2005-0180&language=EN> (accessed 15 January 2012), at pp. 6–7.

  14. For a detailed explanation of the relevance of C&S for the integration of the European securities markets, see C.H. de Carvalho, ‘Cross-Border Securities Clearing and Settlement Infrastructure in the European Union as a Prerequisite to Financial Markets Integration: Challenges and Perspectives’, HWWA Discussion Paper 287 (2004), available at: <http://ssrn.com/abstract=575981> or doi:10.2139/ssrn.575981 (accessed 20 July 2011).

  15. Some stakeholder groups have indeed argued that, in the post-MiFID scenario, the costs of trading for small investors have not decreased; see, for example, ‘Review of the Markets in Financial Instruments Directive (MiFID). Reply from the European Federation of Investors (EuroInvestors)’ (2 February 2011), available at: <http://euroinvestors.org/upload/positions/MiFID%20EFI%20reply%20%202%20Feb%202011%201296749279.pdf> (accessed 15 January 2012).

  16. Directive of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems (the Settlement Finality Directive), OJ 1998 L 166, 11.06.1998, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31998L0026:EN:NOT> (accessed 20 July 2011). The Directive was recently amended by Directive 2009/44/EC of the European Parliament and of the Council of 6 May 2009 amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32009L0044:EN:NOT> (accessed 20 July 2011).

  17. Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (Collateral Directive), OJ 2002 L 168, 27.06.2002, available at: <http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=32002L0047&model=guichett> (accessed 20 July 2011). The Directive was also amended by Directive 2009/44/EC.

  18. A very good explanation of both Directives as well as of other EU measures affecting C&S is provided by K. Löber, ‘The Developing EU Legal Framework for Clearing and Settlement of Financial Instruments’ (2006), ECB Legal Working Paper 1, available at: <http://ssrn.com/abstract=886047> (accessed 20 July 2011).

  19. See Arts. 34, 35 and 46 MiFID.

  20. Communication of the European Commission, COM(1999) 232, 11.05.99, available at: <http://ec.europa.eu/internal_market/finances/docs/actionplan/index/action_en.pdf> (accessed 20 July 2011).

  21. Ibid., at pp. 8 and 22.

  22. See supra n. 12.

  23. Lamfalussy Report, supra n. 12, at p. 16.

  24. Ibid., at p. 16.

  25. The Giovannini Group, composed of financial markets experts and chaired by Alberto Giovannini, was established in 1996 and is hosted by DG ECFIN. Since its creation, it has produced different reports on issues related to financial markets, such as the impact of the euro on capital markets and, more recently, cross-border clearing and settlement in the European Union. Information on the Giovannini Group and its reports is available at: <http://ec.europa.eu/economy_finance/eu/integrating/giovanni_group/index_en.htm> (accessed 20 July 2011).

  26. See supra n. 9.

  27. First Giovannini Report, supra n. 9, at pp. 44–50.

  28. Ibid., at pp. 50–53.

  29. Ibid., at pp. 54–60.

  30. A report with the responses to the consultation can be found at: <http://ec.europa.eu/internal_market/financial-markets/docs/clearing/2002-consultation/responses_en.pdf> (accessed 20 July 2011).

  31. The Giovannini Group, Second Report by the Giovannini Group on EU Clearing and Settlement Arrangements (April 2003), available at: <http://ec.europa.eu/internal_market/financial-markets/docs/clearing/second_giovannini_report_en.pdf> (accessed 20 July 2011).

  32. COM(2004) 312 final, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2004:0312:FIN:EN:PDF> (accessed 20 July 2011).

  33. Commission Communication, supra n. 33, at p. 11.

  34. Commission Communication, supra n. 33, at p. 13.

  35. These were the Clearing and Settlement Advisory and Monitoring Group (CESAME), whose tasks were later taken over by CESAME 2, whose mandates can be found at: <http://ec.europa.eu/internal_market/financial-markets/docs/cesame/mandate_en.pdf> (accessed 20 July 2011) and <http://ec.europa.eu/internal_market/financial-markets/docs/cesame2/mandate_en.pdf> (accessed 20 July 2011) respectively, the Legal Certainty Group, whose mandate is available at: <http://ec.europa.eu/internal_market/financial-markets/docs/certainty/mandate_en.pdf> (accessed 20 July 2011), and the Fiscal Compliance Group (FISCO), whose mandate is available at: <http://ec.europa.eu/internal_market/financial-markets/docs/compliance/mandate_en.pdf> (accessed 20 July 2011).

  36. Commission’s Communication, supra n. 33, at pp. 13 and 22.

  37. European Parliament Resolution on Clearing and Settlement in the European Union (2004/2185(INI)), available at: <http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P6-TA-2005-0301> (accessed 20 July 2011).

  38. C. McCreevy, ‘Clearing and Settlement: The Way Forward’ (11 July 2006), speech at the Economic and Monetary Affairs Committee of the European Parliament, Brussels, available at: <http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/06/450&type=HTML&aged=0&language=EN&guiLanguage=en> (accessed 20 July 2011).

  39. Information on FESE is available at: <http://www.fese.be/en> (accessed 20 July 2011).

  40. Information on EACH is available at: <http://www.eachorg.eu/each/cm> (accessed 20 July 2011).

  41. Information on ECSDA is available at: <https://www.ecsda.eu/site> (accessed 20 July 2011).

  42. See supra n. 2. A very detailed explanation of the rationale for the Code as well as its main features are provided by Moloney, supra n. 12, at pp. 883–888.

  43. Price transparency was identified with the need for clarifying the price/discount schemes offered by C&S platforms to customers of C&S, being the instrument for achieving an increased degree of publicity regarding prices (Code, supra n. 2, at pp. 4–5).

  44. Access and interoperability should ensure that: (a) CCPs have access to other CCPs; (b) CCPs have access to CSDs; (c) CSDs have access to other CSDs; (d) CSDs have access to CCPs; (e) CCPs and CSDs have access to trading venues; (f) trading venues have access to CCPs and CSDs. See J. Mérère, ‘What Is Going on in the Post-Trade Industry in Europe?’, presentation at the 3rd OIC Forum, Istanbul, 24 October 2009, available at: <http://www.oicexchanges.org/presentations/thirdmeeting/annex7%20Merere.pdf> (accessed 20 March 2011), at p. 21. This requires non-discriminatory procedures as well as specific technical arrangements, amongst other measures (Code, supra n. 2, at pp. 6–8). Both aspects were further specified with the publication of the Access and Interoperability Guideline on 28 June 2007, available at: <http://ec.europa.eu/internal_market/financial-markets/docs/code/guideline_en.pdf> (accessed 20 July 2011).

  45. Unbundling of services means that C&S infrastructures shall offer specific services to customers without compelling them to purchase additional services from those infrastructures. Unbundling grants the consumer more flexibility in making a purchase decision. Accounting separation refers to the presentation of different accounts — trading activities, on the one hand, and clearing/settlement, on the other — to national regulators in cases where, for example, the same corporate structure offers trading as well as post-trading activities such as C&S; accounting separation strengthens the qualitative dimension of the services provided by C&S infrastructures (Code, supra n. 2, at pp. 9–10).

  46. 31 December 2006 for price transparency, 30 June 2007 for access and interoperability and 1 January 2008 for unbundling services and accounting separation (Code, supra n. 2, at p. 2).

  47. For more information on the MOG, see <http://ec.europa.eu/internal_market/financial-markets/clearing/mog_en.htm> (accessed 20 July 2011).

  48. See Moloney, supra n. 12, at p. 886.

  49. The list of EGMI members is available at: <http://ec.europa.eu/internal_market/financial-markets/docs/clearing/egmi/members_en.pdf> (accessed 20 July 2011).

  50. Information on the EGMI is available at: <http://ec.europa.eu/internal_market/financial-markets/clearing/egmi_en.htm> (accessed 20 July 2011).

  51. In this regard, see Commission Staff Working Document ‘The Code of Conduct on Clearing and Settlement: Three Years of Experience’ (6 November 2009) (Commission Document on the Code), available at: <http://ec.europa.eu/internal_market/financial-markets/docs/code/2009-11-06-code-report-ecofin_en.pdf> (accessed 20 July 2011), and MOG, ‘Code of Conduct on Clearing and Settlement, Eleventh Meeting of the Monitoring Group (MOG)’ (29 October 2009), available at: <http://ec.europa.eu/internal_market/financial-markets/docs/code/mog/20091029_report_en.pdf> (MOG Report) (accessed 20 July 2011). A July 2009 study by Oxera, ‘Monitoring Prices, Costs and Volumes of Trading and Post-Trading Services’, available at: <http://www.oxera.com/cmsDocuments/Trading%20and%20post%20trading%20report.pdf> (accessed 20 July 2011), provides a detailed analysis of the evolution of costs in the C&S industry after the adoption of the Code. Oxera published a second report on the same issue in May 2011, ‘Monitoring Prices, Costs and Volumes of Trading and Post-Trading Services’, available at: <http://ec.europa.eu/internal_market/financial-markets/docs/clearing/2011_oxera_study_en.pdf> (accessed 20 July 2011).

  52. See supra n. 4.

  53. Scharpf, supra n. 4, at p. 7.

  54. Ibid., at p. 11.

  55. A very good overview of the different types of transnational governance arrangements can be found in T. Risse, ‘Transnational Governance and Legitimacy’, in A. Benz and Y. Papadopoulos, eds., Governance and Democracy (London, Routledge 2006) pp. 179–99. A remarkable recent example is C.R. Kelly, ‘Institutional Alliances and Derivative Legitimacy’, 29 Michigan Journal of International Law (2008) p. 605, who analyses the input/output legitimacy features of law-making alliances between several international organisations.

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  56. See, for example, T. Cottier, ‘The Legitimacy of WTO Law’, Working Paper Swiss National Centre of Competence in Research 2008/19, available at: <http://phase1.nccr-trade.org/images/stories/publications/IP2/The_Legitimacy_of_WTO_Law_cottier_final%200808.pdf> (accessed 20 July 2011).

  57. This is the case of K.D. Wolf, ‘Private Actors and the Legitimacy of Governance beyond the State’, in Benz and Papadopoulos, eds., supra n. 56, pp. 200–227, who applies input/output legitimacy to the analysis of codes of conduct developed by private actors in the corporate field. Another, more recent example is A. C Cutler, ‘The Legitimacy of Private Transnational Governance: Experts and the Transnational Market for Force’, 8 Socio-Economic Review (2010) p. 157. Different contributions on the issue can be found in J.C. Graz and A. Nolke, eds., Transnational Private Governance and Its Limits (London, Routledge 2008).

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  58. A recent example of this type of study at European level is K. O. Lindgren and T. Persson, ‘Input and Output Legitimacy: Synergy or Trade-Off? Empirical Evidence from an EU Survey’, 17 Journal of European Public Policy (2010) p. 449.

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  59. Indeed, two of them, EACH and ECSDA, are listed in the register of interest representatives of the European Commission, see <http://ec.europa.eu/transparencyregister/public/consultation/displaylobbyist.do?id=36897011311-96> (accessed 20 July 2011), and <http://ec.europa.eu/transparencyregister/public/consultation/displaylobbyist.do?id=92773882668-44> (accessed 20 July 2011).

  60. FESE membership information is available at: <http://www.fese.be/en/?inc=cat&id=4>(accessed 20 July 2011).

  61. See, for example, Art. III EACH Articles of Association: ‘Only corporate bodies are eligible for Membership … The Member must either interpose itself legally as a central counterparty (CCP) or assume equivalent responsibility…’, or Art. 5 ECSDA Articles of Association: ‘All members shall be companies of European countries who, in accordance with national legislative or regulatory requirements have as their role one or more of the following: central depository service for financial instruments … Operator of a Securities Settlement Systems (SSS).’ Information on EACH and ECSDA membership is available at: <http://www.eachorg.com/each/cm/members.htm> (accessed 20 July 2011) and <http://www.ecsda.eu/site/members.html> (accessed 20 July 2011) respectively.

  62. An example of a more democratically legitimised monitoring group in the field of financial regulation was the Inter-institutional Monitoring Group for Securities Markets, set up by the EP, Council and Commission in 2002 to assess the implementation of the Lamfalussy process and composed of six independent experts, two nominated by each of the aforementioned European institutions. Information on the Inter-institutional Monitoring Group is available at: <http://ec.europa.eu/internal_market/securities/monitoring/index_en.htm> (accessed 20 July 2011).

  63. See supra n. 52.

  64. Before the MiFID, some European Member States had a so-called concentration rule according to which transactions on equities had to be executed in SEs, thus excluding alternative trading platforms. This was a very important advantage for traditional SEs, which, in proconcentration rule jurisdictions, concentrated all the trading of shares. Some interesting comments on the abolition of the concentration rule are provided by G. Ferrarini and F. Recine, ‘The MiFID and Internalisation’, in G. Ferrarini and E. Wymeersch, eds., Investor Protection in Europe: Corporate Law Making, the MiFID and Beyond (Oxford University Press 2006), available at: <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=922284> (accessed 20 July 2011).

  65. Art. 4(2)(14) MiFID defines an MTF as ‘… a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments — in the system and in accordance with non-discretionary rules — in a way that results in a contract.’

  66. Art. 4(2)(7) MiFID defines an SI as: ‘… an investment firm which, on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market or an MTF.’

  67. A complete list of all regulated markets, MTFs and SIs in Europe is available at: <http://mifiddatabase.cesr.eu> (accessed 20 July 2011).

  68. Some studies addressing the causes and the positive as well as normative implications of competition between stock exchanges and between exchanges and other trading platforms are: S. Brito Ramos, ‘Competition between Stock Exchanges: A Survey’ (2003), FAME Research Paper No. 77, available at: <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=410727> (accessed 20 July 2011); M. Bagheri and C. Nakajima, ‘Competition and Integration among Stock Exchanges: The Dilemma of Conflicting Regulatory Objectives and Strategies’, 24 Oxford Journal of Legal Studies (2004) p. 69; and I. Kokkoris and R. Olivares-Caminal, ‘Lessons from the Recent Stock Exchange Merger Activity’, 4 Journal of Competition Law and Economics (2008) p. 837.

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  69. These are the Proposal for a Directive of the European Parliament and of the Council on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council, COM(2011) 656 final, 20.10.2011 (MiFID II Directive Proposal), available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0656:FIN:EN:PDF> (accessed 16 January 2012), and the Proposal for a Regulation of the European Parliament and of the Council on markets in financial instruments and amending Regulation [EMIR] on OTC derivatives, central counterparties and trade repositories, COM(2011) 652 final, 20.10.2011 (MiFID II Regulation Proposal), available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0652:FIN:EN:PDF> (accessed 16 January 2012).

  70. See Arts. 28–30 MiFID II Regulation Proposal, supra n. 70.

  71. For example, Eurex Clearing AG and Clearstream in Germany and Iberclear S.A. in Spain, are examples of C&S facilities partially or totally owned by SEs, in this case Deutsche Börse AG and Bolsas y Mercados Españoles S.A., respectively.

  72. Competition Commission, A Report on the Proposed Acquisition of London Stock Exchange plc by Deutsche Börse AG or Euronext NV (UKCC Report) (2005), available at: <http://www.competition-commission.org.uk/rep_pub/reports/2005/fulltext/504.pdf> (accessed 20 July 2011).

  73. The lack of competition, would, in the end, be detrimental for investors, who would be subject to higher prices and lower degrees of service and innovation (see UKCC Report, supra n. 73, at p. 70).

  74. Information on the technical aspects of the RR can be found at: <http://www.iberclear.es/IBERCLEAR/NuesBursa/BursaSist.asp?Top=1> (accessed 20 July 2011). The Spanish settlement system is very different from the regimes applied in most European Member States, which are based on balances of securities and not on a registration number. Such divergence between a registry-based and a balance-based system indeed constitutes a barrier to efficient interoperability between Iberclear and other European settlement facilities.

  75. See Art. 32.2 Royal Decree 116/1992, of 14 February, on securities represented by book entries and the clearing and settlement of stock exchange transactions. The English version of the Royal Decree is available at: <http://www.ecb.europa.eu/paym/t2s/progress/pdf/pe_mtg3_iberclear.pdf?9f41986e2d33b667eb0a1042ca53450b> (accessed 20 July 2011).

  76. Turquoise, an MTF, indeed developed a special circumvention procedure in order to comply with the requirements concerning the RR in a less costly manner. This strategy involved using a Spanish broker who, at the end of the trading session, entered an aggregated put-through — corresponding to the total volume of Spanish stocks traded in Turquoise in that journey — in the closing auction of BME, where subsequently the RR was to be provided. An explanation of this procedure is available at: <http://www.tradeturquoise.com/doclibrary/FAQs_Spanish_Trading_English.pdf> (accessed 20 July 2011).

  77. The reform took place through a change in Iberclear’s regulations implemented by two internal rules on 11 November 2010: Circular 6/2010 and Instruction 11/2010. The reform became effective on 18 January 2011. An explanation of the amendments in the Iberclear regulations is available at: <http://www.emcf.com/upload/uploads/101213%20EMCF%20Special%20Round%20Table%20Spain.pdf> (accessed 20 July 2011).

  78. On this issue, see <http://www.thetradenews.com/trading-venues/exchanges/6020> (accessed 20 July 2011).

  79. MOG Report, supra n. 52, at p. 3.

  80. Of course, the democratic features of the law-making process or the institutional setting characterising the EU may be criticised, but the participation of the European Parliament and the Council in the legislative process ensures, to a certain extent, the direct/indirect representation of citizens’ interests, unlike in the case of the Code where the represented interests — at least from a participatory perspective — are only those of the industry. Noteworthy work addressing the democratic deficit associated to the EU’s institutional setting includes C. Harlow, Accountability in the European Union (Oxford University Press 2002), and A. Arnull and D. Wincott, eds., Accountability and Legitimacy in the European Union (Oxford University Press 2002).

  81. An example is the ‘Responses to the Call for Evidence on Commodity Derivatives’, launched by the Commission in the framework of the MiFID, available at: <http://ec.europa.eu/internal_market/securities/isd/consultation/replies_derivatives_en.htm> (accessed 20 July 2011). Another significant recent example is formed by the contributions to the ‘Public Consultation. Review of the Markets in Financial Instruments Directive (MiFID)’ (8 December 2010), available at: <http://ec.europa.eu/internal_market/consultations/docs/2010/mifid/consultation_paper_en.pdf> (accessed 16 January 2012). The industry’s participation in the consultation process was massive; the responses to the consultation authorised for publication are available at: <https://circabc.europa.eu/faces/jsp/extension/wai/navigation/container.jsp> (accessed 16 January 2012).

  82. A thorough report on the influence of the financial industry on financial regulation in the EU is provided by Alter-EU, ‘A Captive Commission: The Role of the Financial Industry in Shaping EU Regulation’ (October 2009), available at: <http://www.euractiv.de/fileadmin/images/ALTER-EU_CaptiveCommission_FINAL_Nov09.pdf> (accessed 16 January 2012). The influence of the hedge fund industry on the regulation of the sector is explained by E. Ferran, ‘After the Crisis: The Regulation of Hedge Funds and Private Equity in the EU’, 12 European Business Organization Law Review (2011) p. 379, at pp. 384–388.

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  85. Code of Conduct Fundamentals for Credit Rating Agencies (December 2004), available at: <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD180.pdf> (accessed 20 July 2011).

  86. Commission Decision of 5 December 2005 setting up a group of experts to report on ways to improve the efficiency of the EU investment fund market, C(2005) 4653, available at: <http://ec.europa.eu/internal_market/investment/docs/other_docs/reports/efficiency-decision_en.pdf> (accessed 20 July 2011).

  87. Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ 2003 L 174/1, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:FULL:EN:PDF> (accessed 20 July 2011), and Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, OJ 2009 L 302/1, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:302:0001:0031:EN:PDF> (accessed 20 July 2011).

  88. For example, with regard to hedge funds, the widespread opinion was that, although they did not cause the crisis, they did exacerbate its effects due to their trading activities and strategies, such as short selling, see Ferran, supra n. 83, at pp. 388–389. A paper that explains the role of credit rating agencies in the financial crisis and proposes systemic regulation of the sector is that by A.N.R. Sy, ‘The Systemic Regulation of Credit Rating Agencies and Rated Markets’ (2009), IMF Working Paper 09/129, available at: <http://www.imf.org/external/pubs/ft/wp/2009/wp09129.pdf> (accessed 16 January 2012).

  89. For a review of different regulatory initiatives at international level, see P. Deb, M. Manning, G. Murphy, A. Penalver and A. Toth, ‘Whither the Credit Ratings Industry?’, Bank of England Financial Stability Paper No. 9 (2011), available at: <http://www.bankofengland.co.uk/publications/fsr/fs_paper09.pdf> (accessed 16 January 2012), at pp. 12–16.

  90. In this regard, see also Moloney, supra n. 12, at p. 884.

  91. On this issue, see <http://www.thetradenews.com/trading-venues/exchanges/4508> (accessed 20 July 2011). Information on the review process is available at: <http://ec.europa.eu/internal_market/securities/isd/mifid_en.htm> (accessed 20 July 2011). In December 2010, the Commission launched a public consultation concerning the review of the MiFID, which is available at: <http://ec.europa.eu/internal_market/consultations/docs/2010/mifid/consultation_paper_en.pdf> (accessed 20 July 2011). MiFID II legislative proposals were launched in October 2011, see supra n. 70.

  92. Information on the initiative regarding securities law is available at: <http://ec.europa.eu/internal_market/financial-markets/securities-law/index_en.htm> (accessed 20 July 2011). There have been two consultation procedures related to this initiative: the first one was launched in April 2009 and is available at: <http://ec.europa.eu/internal_market/consultations/docs/2009/securities-law/hsl_consultation_en.pdf> (accessed 20 July 2011), the second procedure started in November 2010 and can be found at: <http://ec.europa.eu/internal_market/consultations/docs/2010/securities/consultation_paper_en.pdf> (accessed 20 July 2011).

  93. A consultation on this issue was launched by the Commission in June 2010. The document is available at: <http://ec.europa.eu/internal_market/consultations/docs/2010/derivatives/100614_derivatives.pdf> (accessed 20 July 2011).

  94. A consultation procedure on CSDs and securities settlement was conducted in January 2011. The relevant document can be found at: <http://ec.europa.eu/internal_market/consultations/docs/2011/csd/consultation_csd_en.pdf> (accessed 20 July 2011).

  95. See supra n. 52.

  96. Commission Document on the Code, supra n. 52, at pp. 1 and 8.

  97. Proposal for a Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, COM(2010) 484 final, 15.09.2010, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0484:FIN:EN:PDF> (accessed 20 July 2011).

  98. Over-the-counter derivatives are not executed in a regulated market (see Art. 2(5) of the Proposal for a Regulation). They have been the subject of important recent debates due to their impact on the 2007–2010 world financial crisis. For example, the Commission presented a very complete analysis of the role of derivatives in the financial crisis in its Communication ‘Ensuring Efficient, Safe and Sound Derivatives Markets’, COM(2009) 332 final, 03.07.2009, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2009:0332:FIN:EN:PDF> (accessed 20 July 2011). A very good example of the relevance of OTC derivatives as a subject of major political discussion is the G-20’s Leaders’ Statement at the Pittsburgh Summit (24–25 September 2009), available at: <http://www.g20.org/Documents/pittsburgh_summit_leaders_statement_250909.pdf> (accessed 20 July 2011).

  99. Art. 3 Proposal for a Regulation, supra n. 98.

  100. See, for example, Art. 24, ibid. Legislative activity regarding the governance features of CCPs is justified by the introduction of mandatory clearing in CCPs for OTC derivative contracts, a fact which increases the rationale of clearing facilities being subject to stricter governance arrangements (in this regard, see ibid., at p. 9).

  101. Art. 50, ibid. Interoperability agreements raised important concerns among British, Dutch and Swiss regulators, who considered that the application of the Code’s provisions entailed the risk of counterparty risk for CCPs. As a result, this led to objections to interoperability agreements in those jurisdictions. On this issue, see <http://ec.europa.eu/internal_market/financial-markets/docs/code/mog/20100315_afm_dnb_fsa_en.pdf> (accessed 20 July 2011).

  102. Indeed, Art. 48.1 of the Proposal for a Regulation, supra n. 98, reads as follows: ‘A CCP may enter into an interoperability arrangement with another CCP …’, clearly stating the voluntary nature of interoperability.

  103. Art. 28.2, ibid. Moreover, the competent authorities are empowered to ‘terminate’ situations where unsuitable shareholders exercise a negative influence according to Art. 28.4, ibid.

  104. Art. 29.2–8, ibid. The assessment of suitability in these cases would include criteria such as the influence of the acquirer on the CCP’s compliance with the Regulation (Art. 30.1(c), ibid.).

  105. The development of the legislative process can be found at: <http://www.europarl.europa.eu/oeil/file.jsp?id=5872702> (accessed 20 July 2011).

  106. The de Larosière Group, The High-Level Group on Financial Supervision in the EU. Report (de Larosière Report) (February 2009), available at: <http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf> (accessed 20 July 2011).

  107. The Commission asked the group to work on the following areas: firstly, organisational aspects of European financial supervision; secondly, cooperation regarding financial stability and crisis management; and thirdly, inter-jurisdictional cooperation between European Member States’ competent authorities and other non-EU financial supervisors (see Annex I of the de Larosière Report, supra n. 120).

  108. De Larosière Report, supra n. 120, at p. 69.

  109. These were the so-called Lamfalussy Level 3 Committees. For a description of the Lamfalussy Committees, see Ferran, supra n. 12, at pp. 75–82. The Lamfalussy Committee in charge of securities markets was the Committee of European Securities Regulators (CESR), established by Commission Decision of 6 June 2001, OJ 2001 L 191/43, repealed by Commission Decision of 23 January 2009, OJ 2009 L 25/18, available at: <http://www.esma.europa.eu/popup2.php?id=338> and <http://www.esma.europa.eu/popup2.php?id=5548> respectively (accessed 20 July 2011).

  110. De Larosière Report, supra n. 120, at pp. 44–48.

  111. For an explanation of the legislative procedure leading to the new European financial supervision architecture, see P. Iglesias-Rodríguez, ‘Towards a New European Financial Supervision Architecture’, 16 Columbia Journal of European Law Online (2009) pp. 1–6, available at: <http://ssrn.com/abstract=1518062> (accessed 20 July 2011).

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  112. Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (ESMA Regulation), OJ 2010 L 331/84, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:331:0084:0119:EN:PDF> (accessed 20 July 2011).

  113. Regulation (EU) 1093/2010, of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (EBA Regulation), OJ 2010 L 331/12, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:331:0012:0047:EN:PDF> (accessed 20 July 2011).

  114. Regulation (EU) 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/79/EC (EIOPA Regulation), OJ 2010 L 331/48, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:331:0048:0083:EN:PDF> (accessed 20 July 2011).

  115. For a complete analysis of ESMA and its implications, see N. Moloney, ‘The European Securities and Market Authority and Institutional Design for the EU Financial Markets — A Tale of Two Competences: Part (1) Rule-Making’, and idem ‘Part (2) Rules in Action’, 12 European Business Organization Law Review (2011) p. 41 and p. 177 respectively.

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  116. Art. 8.1 ESMA Regulation, supra n. 126.

  117. Arts. 290 and 291 of the TFEU respectively. Delegated acts are non-legislative acts which have been adopted by the Commission following a delegation contained in an EU legislative act and which supplement or amend non-essential aspects of that legislative act (Art. 290.1 TFEU). The EP and the Council may revoke such delegation (Art. 290.2(a) TFEU) or may even reject its outcome (Art. 290.2(b) TFEU). Implementing acts are adopted by the Commission on the basis of a delegation contained in a legally binding legislative act and set uniform conditions for the implementation of that act in the Member States (Art. 291.2 TFEU).

  118. Recital 23, ESMA Regulation, supra n. 126.

  119. Art. 24.9 Proposal for a Regulation, supra n. 98.

  120. The parliamentary discussions during the legislative procedure leading to the creation of ESMA are available at: <http://www.europarl.europa.eu/oeil/FindByProcnum.do?lang=en&procnum=COD/2009/0144> (accessed 20 July 2011).

  121. Art. 3 ESMA Regulation, supra n. 126.

  122. Art. 37.2, ibid. In July 2011, the SMSG included 11 representatives from the financial industry, 7 representatives from users of financial services, 1 representative from trade unions, 1 representative from SMEs, 5 representatives from customers, and 5 representatives from the academic sector. The composition of the SMSG can be found at: <http://www.esma.europa.eu/index.php?page=groups&mac=0&id=64> (accessed 20 July 2011).

  123. This is required by Art. 37.2 ESMA Regulation, supra n. 126. It should however be pointed out that the same Article creates a statutory right to a minimum number of seats for the representatives of the financial industry (10) and for academics (5).

  124. There are, however, some legitimacy concerns as regards the input/output legitimacy of the ESAs’ Stakeholder Groups. Notably, the financial industry is better represented in these Groups and thus carries more weight in the final advice provided to the ESAs. Moreover, in cases of urgency, the ESAs may not consult the Stakeholder Groups; this is explained by P. Iglesias Rodriguez, ‘The Role of Interest Groups in EU Financial Regulation after the European Supervision Authorities in the Financial Field: The Case of the Stakeholder Groups’, European Society of International Law Conference Paper 1/2011. The advice issued so far by the SMSG includes not only the majority’s opinions but also dissenting views among the members of the group, a fact that positively contributes to the representativeness of the SMSG’s advice. See, for example, ‘Advice on ESMA’s Public Consultation on UCITS Exchange-Traded Funds in the European Union’, ESMA/2011/SMSG/18 (29 November 2011).

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I am very grateful to an anonymous referee of EBOR for helpful comments and to Suzanne Habraken for her excellent editing work. The paper has benefitted from feedback from Philipp Kiiver, Panos Koutrakos, Luc Verhey and the participants in the Montesquieu Research Meeting at Maastricht University on 21 October 2010.

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Iglesias-Rodríguez, P. The Regulation of Cross-Border Clearing and Settlement in the European Union from a Legitimacy Perspective. Eur Bus Org Law Rev 13, 441–474 (2012). https://doi.org/10.1017/S1566752912000304

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