A comparative analysis of the US and EU retail banking markets - Wsbi

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■ Best execution Investor protection is further upheld by the rules on best execution. This concept represents a major change, especially in those Member States that previously used the concentration rule, where best execution in practical terms meant simply transmitting the order to the national exchange. Now, the best execution rule obliges Member States to “require that investment firms take all reasonable steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order” 230 . Investment firms must analyse the importance of these factors according to their clients needs and on that basis seek the execution venue that offers the best execution conditions. A list of venues which the investment firm has access to and the factors affecting such choice must be pre-defined in the order execution policies of each investment firm and pre-approved by the clients. As stated above, MiFID acknowledges that not all clients have equal knowledge about investment services and products. To this end, best execution requirements are even more stringent when orders are executed on behalf of a retail client. In such cases, investment firms are obliged to consider both the price of the financial instrument and all the costs associated with the execution 231 . ■ Transparency The MiFID introduced new requirements on systematic internalisers, MTFs and regulated markets to increase pre-trade transparency as well as requirements on all trading venues to increase post-trade transparency. These provisions currently apply only to trading of shares, but there is a possibility that the rules would be extended to other financial instruments at a later stage. Pre-trade transparency requirements oblige regulated markets, MTFs and systematic internalisers to publish prices at which they are willing to trade and keep them up to date during working hours 232 . This is a complete novelty as regards the systematic internalisers, which were not subject to any similar rules prior to the introduction of the MiFID. The end of the concentration rule implies that the stock exchanges will face increasing competition from MTFs and systematic internalisers and it is therefore necessary to impose similar rules on all execution venues and thereby create a level playing field between them. The widened scope of pre-trade transparency is also expected to contribute to price discovery as investors will have a better overview of the market liquidity. All trading venues (regulated markets, MTF and all investment firms) became also subject to post-trade transparency requirements of the MiFID. Under this concept, they must make public the volume and price of those transactions and the time at which they were concluded, as close to real-time as possible 233 . In principle, a maximum limit to disclose this information is three minutes, but certain exceptions will be allowed for block-size trades which require longer periods in order to avoid market disruption. 4.3.4 Comparison Significant regulatory changes in the securities markets field are currently being implemented in both in the US and the EU. The US is preparing to modernise its National Market System, while the EU is preparing to implement the MiFID. The main objectives of both the Regulation NMS and the MiFID are rather similar: to improve the functioning of the financial markets and to increase the protection of investors. The respective authorities have already adopted both the Regulation NMS and the MiFID, the former entering into force in autumn 2006 and the latter in autumn 2007. Neither of the two legislative frameworks is a complete novelty (the Regulation NMS is based on the main ideas of National Market System that has been developing since 1975, whereas the MiFID is in fact a revision of the 1993 ISD), but both introduced a number of key rules that are expected to have a significant influence on the industry. 230 Article 21(1) of the MiFID. 231 Associated costs that could occur could be various commissions, fees, taxes, exchange fees, etc, charged by various intermediaries involves in the transaction, but not the firm’s internal charges (as envisaged by the Commission’s background note of the draft Commission implementing Directive). 232 Articles 27, 29 and 44 of the MiFID. 233 Articles 28, 30 and 45 of the MiFID. 72
Best execution rules exist in both the US and the EU now, obliging investment firms to execute transactions on the conditions most favourable to their clients. However, neither the Regulation NMS nor the MiFID defines precise requirements that must be met to satisfy the obligation. They both suggest a number of indicators that should be taken into account while determining what best execution is (such as price, cost, speed, likelihood of execution, etc.), but the final decision is left to investment firms. Both in the US and in the EU investment firms are obliged to define their execution policy and present it to investors at the beginning of their business relationship. As an extension of the best execution rule, the US legislation obliges trading centres to publish monthly statistics that include uniform measures of order execution quality. Investment firms must also disclose quarterly statistics on where the orders were routed. The European legislation does not require such consolidated statistical reports (with the exception of systematic internalisers which make use of a post-trade transparency waiver that allows them not to disclose their identity when publishing the data in a real time and as a result they will most likely be obliged to publish a quarterly summary of the volumes they traded). The national best bid and offer (NBBO) connects the markets in a way that it requires information on best quotations throughout the day to be continuously gathered and disseminated to the public, so that investors always know the best prices for NMS stocks and are able to compare them against the prices at which their orders were executed. Neither the MiFID nor any other EU legislation requires that best quotes be gathered and disseminated. Pre-trade rules in the MiFID require systematic internalisers to publish their quotes in those shares admitted to trading on a regulated market for which they are systematic internalisers and for which there is a liquid market. Regulated markets and MTFs are also covered by a pre-trade transparency requirement. Pre-trade transparency also exists in the US legislation. Namely, the quote rule requires OTC market makers to publish firm quotations for any listed security when these market participants represent more than 1% of the aggregate trading volume for that security. Europe is also getting new post-trade transparency rules, as the MIFID obliges all three types of markets (regulated markets, MTF and all investment firms) to make public the volume and price of executed transactions and the time at which they were concluded. The US recently introduced post-trade transparency rules for corporate bonds, although no evidence of post-trade requirements was found in relation to equity securities. The changes in the regulatory framework in both the EU and the US have facilitated the linkage of traditionally segregated markets in recent years. An increased number of securities listed on one market started to be traded on others, causing stock exchanges to significantly widen the basis of their operations. In order to better respond to the challenge of facilitating increased trading and to widen their market access, stock exchanges became interested in mergers/takeovers, both between organisations that provide similar services and between organisations that deal with different activities in the securities transaction process. Nevertheless, one has to note that such mergers and takeovers have so far been carried out within the EU or within the US, whereas transatlantic mergers have not yet been that numerous, although showing good signs of a future increase. It is acknowledged that the US as well as the European Member States have highly competitive domestic capital markets, but enhanced convergence of the two legal systems is expected to contribute to even further opportunities for all market participants. A study predicted that full transatlantic financial market integration may lead to a reduction in costs of equity capital by almost 9%, which would be a result of a reduction in transaction costs by 60% and an increase in trading volume by almost 50% 234 . The dialogues between the European Commission and the US Securities Exchange Commission have highlighted the fact that both the US and the EU share the same vision of sound financial markets, though the ways of achieving it often differ. The underlying objective however is not to create one set of rules for the two jurisdictions; instead the challenge is to converge some of the regulatory practices, avoid frictions and identify similarities which could finally increase cooperation and possibly lead to mutual recognition in certain areas. 234 “Transatlantic financial market integration: Ambition needed”, Deutsche Bank Research, 29 November 2005. 73
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September 2006 RESEARCH A COMPARATI
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IE UK FR BE NL LU DK DE SE CZ AT SL
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The following WSBI/ESBG committees
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4 Regulation and supervision compar
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6.5 Issues of competition in retail
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To finish, if we had to pick from a
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In the US, credit institutions have
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Following the same logic, the EU co
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In that context, it is tempting to
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Page 23 and 24: The market share of the US banking
Page 25 and 26: FDIC-insured commercial banks are i
Page 27 and 28: The subsidiary stock institution is
Page 29 and 30: Regulatory reform over the past thi
Page 31 and 32: State credit unions were first exem
Page 33 and 34: There has however been much effort
Page 35 and 36: 3.2.2.2.2.2 Ownership and corporate
Page 37 and 38: Hermann Schulze-Delitzsch and Fried
Page 39 and 40: In contrast, building societies in
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Page 43 and 44: 4. REGULATION AND SUPERVISION COMPA
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Page 57 and 58: In the European Union, contrary to
Page 59 and 60: Although younger than CESR, both CE
Page 61 and 62: 4.2.5.1.1.1.1 Limitation of the geo
Page 63 and 64: 4.2.5.1.1.3 Recent trend: regulatio
Page 65 and 66: Another important common feature be
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Page 69 and 70: 4.3.2.2.4 National Market System ru
Page 71: The ISD set a basis for the develop
Page 76 and 77: The decline of savings institutions
Page 78 and 79: Relative to population, the Europea
Page 80 and 81: 5.2.2 Size of credit institutions 5
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Page 84 and 85: 5.2.3 Concentration and consolidati
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Page 112 and 113: 6.2.1.3 Comparison 6.2.1.3.1 Size o
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6.2.3.1.2 Lenders to small business
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The securitisation process requires
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Factoring is also continuously gain
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6.2.3.2.4 Securitisation of small b
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The above fears can hardly be allay
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- ACH credits and debits: the stati
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6.3.2.1.2 Financial intermediaries
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It should be noted that two of the
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Assuming that technology, globalisa
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The report adds: “although it bou
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Graph 19: Use of different distribu
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In terms of funding of the business
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Since then, established banks have
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MoU Memorandum of Understanding OTC
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Annex 2: Statistical appendix Table
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Table F: Share of US banking indust
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Table L: Structure of the liabiliti
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Table R: Number of ATMS in the EU a
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F - Federal Deposit Insurance Corpo
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