Europe post-trade fragmentation raises costs for savings and investments union

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Europe post-trade fragmentation costs

Highlights

Only about 40% of European stock trading now occurs on the listing exchange, with post-trade fragmentation driving increased costs and unresolved structural barriers.
ESRB warns that CCP fragmentation heightens collateral demand and procyclicality, while CSD concentration introduces stability risks due to single points of failure.
Draghi 2024 and ESRB call for stronger European-level regulatory oversight to address cross-border risks, pricing power, and transparency in clearing and settlement.

Post-trading structure and reform options

As reported by ESRB, Europe’s post-trading set-up for equities remains a long-standing obstacle to better-functioning capital markets, despite years of reform aimed at increasing competition. The assessment says regulators have made more progress in trading than in clearing, settlement and custody, leaving significant cross-border barriers in place.

Before 2007, European countries largely operated national monopolies in securities trading and post-trading. Since the Markets in Financial Instruments directives opened trading to greater competition, equity dealing has become increasingly dispersed across venues, with only about 40% of trading in European stocks now taking place on the listing exchange.

That shift has sharpened attention on what happens after a trade is executed, because transactions are only final once cash and securities are exchanged and ownership is recorded. Earlier efforts to remove the Giovannini barriers identified in 2001 and 2003 have not fully resolved the structural frictions, and the Draghi 2024 report has again highlighted limited competition in post-trading services.

Stability risks and implications for European oversight

The ESRB highlights four main financial stability concerns linked to possible changes in market structure. Fragmentation across central counterparties, or CCPs, reduces multilateral netting and increases aggregate collateral demand, which can amplify procyclical pressures during periods of market stress.

At the same time, concentration in issuer central securities depositories, or CSDs, can create single points of failure across the settlement chain, a risk that could intensify under an overly centralised European model. Interoperability arrangements may ease some netting problems, but they can also open contagion channels between CCPs, while the coexistence of distributed ledger technology and legacy systems raises further questions about netting efficiency and collateral needs under stress.

The analysis concludes that reducing post-trade fragmentation would likely require a stronger role for regulators and supervisors at European level rather than national level. In its view, more centralised oversight could reduce regulatory bias, address cross-border spillover risks and improve transparency and pricing convergence in clearing and settlement, helping counter the pricing power of CCPs and especially CSDs.

Our earlier article on the rapid growth of tokenized stocks explained how demand for 24/7 equity access is pushing more share exposure onto blockchain rails. We noted that while these tokens typically track traditional shares on a 1:1 basis, they settle on crypto networks rather than through conventional clearing and settlement, which can extend trading hours but also comes with a less mature market structure and familiar volatility tied to the underlying stock.

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