The developing EU legal framework for clearing and settlement of financial instruments

Traditionally, clearing and settlement of financial instruments has not been the focus of general attention, even though it is at the heart of any financial system. The on-going integration of financial markets, and in particular the process of creating a single market for financial services in the European Union (EU), has put in the spotlight the importance of clearing and settlement. Weaknesses in the clearing and settlement infrastructure can have serious consequences for the financial sector as a whole. In view of this, the European Commission has given high priority to removing the barriers to efficient cross-border clearing and settlement in the single market. Clearing and settlement depends to a large extent on the legal infrastructure on which it is built. Clear and effective legal rules are a prerequisite for building market confidence, fostering investor protection and limiting and managing systemic risk. A modern and efficient legal framework in the EU will not only enhance the safety, soundness and efficiency of the clearing and settlement of financial instruments, it will also promote the further integration and competitiveness of European financial markets. This paper presents and evaluates the existing EU legislative framework. Furthermore, the paper describes current EU initiatives to remove barriers to efficient clearing and settlement, with a specific focus on the legal aspects and, in particular, on the activities of the Legal Certainty Group. Finally, it compares the European initiatives with parallel efforts to harmonise laws on a global scale and gives an outlook as to how the acquis communautaire could evolve in the short to medium term. JEL Classification: K12