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Wine glass, hourglass, or bottomless glass - integration in securities trading and settlement

Wine glass, hourglass, or bottomless glass - integration in securities trading and settlement. Jens Tapking (ECB) Jing Yang (BOE). Prepared for Taiwan _ EFMACI 2005. Current Industry Structure in Europe. Euronext. Deutsche Bourse. LSE. BVLP. Paris. BSE. AEX. Euroclear Bank (BE).

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Wine glass, hourglass, or bottomless glass - integration in securities trading and settlement

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  1. Wine glass, hourglass, or bottomless glass - integration in securities trading and settlement Jens Tapking (ECB) Jing Yang (BOE) Forthcoming Journal of Money, Credit and Banking Prepared for Taiwan _ EFMACI 2005

  2. Current Industry Structure in Europe Euronext Deutsche Bourse LSE BVLP Paris BSE AEX Euroclear Bank (BE) Euroclear NL Euroclear France CREST Clearstream Frankfurt Euroclear Group

  3. Aim of the paper

  4. Aim of the paper • To identify the competition and welfare implications of horizontal • and vertical integration of securities trading and settlement service • providers (exchanges and CSDs). • It is often said that consolidation has • > a positive effect because it reduces operating costs • > a negative effect because it reduces competition • However, we show that the latter is not necessarily true!

  5. Road Map • Structure of the model • Securities markets equilibrium • Overall equilibrium • Welfare analysis

  6. Structure of the model

  7. 2) Structure of the model Country B Country A A investors B investors Ex B Ex A STP STP CSD A CSD B Bilateral link

  8. Assumptions • Every trade executed on Ex A has to be settled in CSD A and every trade executed on Ex B has to be settled in CSD B. • The two CSDs maintain a bilateral (direct) link. • Initially, all A investors are members of Ex A and CSD A, but not of Ex B and CSD B. But each A investor can become member of Ex B and CSD B at a cost of t (to be borne by the investor). The same holds for B investors.

  9. Preference of investors Benefit y y = i Benefit of holding home stocks y = 1-i Benefit of holding foreign stocks 0 1 Name of investors

  10. Two-stage model Stage2 Stage 1 Exchanges set transaction fees CSDs set prices for settlement of trades executed on exchange and for transfers of securities through the link Each investors chooses the demand and supply by maximising his benefit. Security markets

  11. Structure of the model

  12. Substitutes and complements

  13. Substitutes and complements

  14. Securities market equilibrium

  15. Securities market equilibrium

  16. Securities market equilibrium

  17. Overall equilibrium

  18. Overall equilibrium

  19. Vertical integration and complete separation

  20. Vertical integration and complete separation

  21. Welfare analysis

  22. Welfare analysis

  23. Conclusion • A full technical integration of CSDs is always the best no matter whether there is an additional vertical integration or not. • If the cost for transferring is low, then a legal integration of two CSDs is the second best. • If the cost for transferring is high, then a vertical integration of a stock exchange and a CSD in both countries is second best.

  24. Order of preference

  25. Thank You Jing.yang@bankofengland.co.uk

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