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Clearing and Settlement of Derivatives: Is a Code of Conduct Advisable?
Author(s) -
Nielsson Ulf
Publication year - 2010
Publication title -
european law journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 54
eISSN - 1468-0386
pISSN - 1351-5993
DOI - 10.1111/j.1468-0386.2010.00519.x
Subject(s) - clearing , settlement (finance) , comparability , derivatives market , competition (biology) , code (set theory) , code of conduct , database transaction , business , collusion , transaction cost , industrial organization , economics , international economics , finance , computer science , ecology , mathematics , set (abstract data type) , combinatorics , political science , law , payment , biology , programming language , futures contract
This article is a first step to assess whether a self‐regulatory ‘Code of Conduct’, which has been in effect for European equities, should also be extended to derivatives. The aim of the code is to increase competition and customer choice in the European transaction process (trading, clearing and settlement). The article examines whether such a code is advisable for derivatives by evaluating potential market failures and inefficiencies in European derivatives markets. More specifically, the article: a) highlights the main differences in the clearing and settlement procedures of derivatives versus equities; b) outlines current and alternative market infrastructures in derivatives post‐trade markets; and c) evaluates the current level of competition among derivatives exchanges and also between the on‐ and off‐exchange trading segments. The article concludes that if imminent initiatives taken to increase the competitiveness of over‐the‐counter (OTC) derivatives markets vis‐à‐vis the incumbent derivatives exchanges—such as increased clearing house usage and new entry of multilateral trading facilities—are not effective in the near future, a code of conduct could be envisaged. This should entail promoting faster automation of OTC post‐trade processes and ensuring price comparability is maintained between derivatives exchanges.