Cost efficiency in the European securities settlement and depository industry

We examine whether the European settlement and custody institutions operate in an efficient way. To do this, we start from an analytically founded discussion regarding the activities performed by the operators in this sector. Based on the insights obtained, we estimate both a translog cost function and a constant elasticity of substitution - quadratic cost function. From the results obtained, there clearly are economies of scale in this industry. Moreover, also economies of scope between the activities performed are present. These findings imply that probably further consolidation is ahead, and that separating certain activities from others can only be done at a cost in terms of efficiency.