Fragmentation in the foundations of the Savings and Investments Union: the case of equity market post-trade infrastructure

Recent comment on the progress of European Savings and Investments Union, or ‘SIU’, has noted the fragmentation of Europe’s capital markets and their relatively small size compared to similar markets in the United States. It has been suggested that the prior ‘bottom up’ SIU strategy of developing local and regional capital markets and then removing the barriers to the integration of those markets is unlikely to lead to sufficiently large, integrated and efficient capital markets in Europe, and thus that a ‘top down’ strategy for SIU is now needed. The case of equity market settlement systems is used to interrogate this claim. A nuanced picture emerges. European post-trade infrastructure is undoubtedly more fragmented, more costly to use on average, and less robust than the equivalent in the United States. Some of this fragmentation and inefficiency results from the independent development of legal systems and financial markets in different EU states and some from quasi- or actual monopolies within groups which combine trading and post-trade infrastructures. While the barriers for full EU-level integration are formidable, this paper argues that significant progress is nevertheless possible. It further suggests that it is important to judge the progress of SIU not only by comparison of EU to US market efficiency, but also with the rather different goals of European and American financial markets policy in mind.