Forging a more efficient clearing and settlement landscape is coming together slowly – while rival private sector initiatives also gain support, reports Lynn Strongin Dodds ...
Finding a way to make the clearing and settlement of pan-European trades in Europe more cheap and efficient was never going to be easy. But progress is coming – at least slowly. The Target2Securities (T2S) initiative by the European Central Bank (ECB) now looks like it might become a reality.
In mid-July, the ECB’s governing council gave the green light to plans to build a pan-European integrated settlement system and handed over its development and operation to the Deutsche Bundesbank, the Banco de España, the Banque de France and the Banca d’Italia. The project is slated to cost over €200m and is set to be launched in 2013.
T2S will service the national central securities depositories (CSDs) in Europe and will be run by the Eurosystem – the network of European central banks including the ECB that are in the euro. It will initially cover only euro-traded securities. But other currencies are expected to be included in the future and the ECB is currently canvassing CSDs outside the euro arena for their opinion. Overall, the aim is to cut the settlement costs by increasing competition and price transparency. Currently, banks need to maintain expensive connections with national settlement companies or pay agent banks for access to them.
One of the main sticking points has been the ECB’s involvement. The bank has argued that its intervention was due to the market’s failure to provide an adequate solution. It also noted that other central banks, including the US Federal Reserve, have traditionally been involved in settlement activities.
Diana Dijmarescu, managing director, global market infrastructures at JPMorgan Treasury & Securities Services, says: “The ECB decided to take a leadership role in promoting harmonisation farther down the investment chain and T2S is definitely a positive development. The success of the project, though, depends on it achieving critical mass and the ability of non-euro CSDs to join. The more CSDs that join, the more volumes will be processed and the easier it will be to reduce the cost.”
Some national CSDs have bristled at the idea of T2S, probably due to fears of losing too much revenue. While they have all given their backing, some have been more supportive than others. For example, Euroclear, the largest European settlement agent, which handles the UK, Irish, French, Belgian and Dutch markets, and its rival Clearsteam, which is owned by Deutsche Böerse and covers the Luxembourg and German markets, have voiced their concern over legal and governance issues.
There are also question marks over T2S’s projected financial savings for national depositories and their members. The ECB says that settling a cross-border transaction through T2S will cost only 28 eurocents because national depositories that link to the platform can reduce their operating costs by at least €85m annually. Settlement of cross-border transactions in Europe can cost between €5 and €20, depending on the number of intermediaries involved. By contrast, two counterparties settling on the books of a CSD or international securities depository could pay as little as 50 eurocents.
Considerations and concerns
There are still a lot of unanswered questions, according to Paul Symons, director and head of public affairs at Euroclear. “We agree with the objectives of T2S and are happy to support the project in terms of advisory and technical matters, but there are three conditions we would like to see met before we enter into a contractual agreement. This is not surprising in that few organisations are willing to sign on the dotted line for a commercial product that is not going to be ready for another five years.”
According to Symons, the main issues revolve around the cost and the legal and contractual framework that governs the relationship between the ECB, CSD, and suppliers. Also, there is the issue of the governance structure safeguarding CSD interests, and the issue of user choice between the T2S platform and Euroclear’s single platform. Euroclear is developing a single platform in response to the post-trade challenges and it is due to be completed in 2011. It will create a unified securities’ processing system and depository across Euroclear’s five markets, as well as the recently acquired Finnish and Swedish CSDs.
Symons says: “I do not see our single platform as a competitor but as a complementary offering. There are meaningful distinctions to consider in that T2S provides settlement, whereas we offer settlement, custody and collateral management [which are not included in T2S]. The most important point, though, is that clients will have a choice as to which platform they may use in terms of settlement.”
Clearstream has similar concerns to Euroclear and in its letter to the ECB, the group called for the bank to publish a pricing plan for settlement houses that use T2S and a detailed project plan with clear milestones for progress. It also requested that the ECB enter into legal contracts with the companies, laying out its commitments within the project.
Clearstream is also part of a group behind another solution, which is called Link Up Markets. Katja Rosenkranz, a member of the executive board at Clearstream, believes that this initiative is consistent with the aims of T2S. “We see Link Up Markets as a complementary service focusing on the needs of asset services and providing, in an efficient way, the links between CSDs that are needed for T2S. We have reassured the ECB of our support and it is our eventual goal to plug into T2S.”
Link Up Markets is a joint venture between seven CSDs – Greece’s Hellenic Exchanges, Spain’s Iberclear, Austria’s Oesterreichische Kontrollbank, Switzerland’s SIS SegaInterSettle, Denmark’s VP Securities Services and Norway’s VPS.
According to Tomas Kindler, managing director of Link-Up, the platform seeks to create a common infrastructure by the first half of 2009 that will absorb the differences in communication standards currently existing between the CSDs. It will enable easy implementation of links between CSD markets and introduce efficient cross-border processing capabilities. By connecting to the common infrastructure, each participating CSD has access to the services of the other participating CSD markets across all asset classes except derivatives.
Kindler notes that customers will benefit from a single access to almost 50% of the European securities market and receive consistent best-in-class CSD settlement and custody services. This should translate into reduced cross-border transaction costs and savings from a harmonised set of processes. “We have said that costs can be reduced by up to 80%, while fees on existing CSD links have potential for reduction, albeit at a lower level than 80%. It will also create choice in the way people access markets.”
Frank Gast, a manager in financial services at BearingPoint Ireland, a management consultancy, says: “T2S has forced the other participants to come up with their own solutions. In some ways this has caused a split in Europe with the launch of Link Up Markets, which is more of a continental approach, and Euroclear’s single platform, which is more of an Anglo Saxon response. Although the eventual aim is to have a single European platform, these two initiatives are much better than the fragmentation that we have today. They are also both set to launch much earlier than T2S which has a timeline of 2012/13.”
Some commentators believe that there is room for more than one platform in Europe. Robert Barnes, managing director for equities at UBS, the investment bank, says: "Competition can be good in the post-trading space. The potential of T2S is to enable settlement providers the ability to operate across a pan-European rather than just a national level for those aspects not constrained by domestic legal and fiscal differences.”
As a case in point, UBS Investment Bank uses nine agent banks to service settlement with CSDs for nine out of ten Eurozone countries.
Barnes adds: “With T2S, we may still need agent banks for asset servicing – for example, corporate actions management, which is out of the scope of T2S. The prize for agent banks and central securities depositories, as well as new entrants, is to capture more business, as a firm like UBS may look to reduce the number of providers from five to three to two or one across the European Union.
“T2S is not scheduled to go live for another few years but it is already encouraging participants to work more efficiently and effectively. Now is the time for agent banks and CSDs to seize the opportunity to make the next step of the business case – and we are pleased to see the market already responding with complementary proposals like Link Up Markets. Therefore, from a global banking perspective and T2S, we urge incumbents and new entrants to volunteer proposals for lower fees and improved market efficiency."
Florence Fontan, head of European affairs at custody bank BNP Paribas Securities Services, says: “There is no alternative project to T2S in terms of providing the same level of integration and benefit. Its scope is the Eurozone, at least potentially 25 markets in Europe and eventually beyond, whereas the other initiatives cover a much smaller number.”
She adds: “It is not surprisingthat the CSDs are concernedover the impact [T2S] will have on their revenue streams, but it is unrealistic to expect that all the issues will have been tackled five years before the system is live. What we need now is a firm commitment from the CSDs to participate in T2S when it is live, and to play the rules of the game by actually reducing their settlement costs.
“As for the ECB, it is important that the Eurosystem confirms the cost and the timing of the project as quickly as possible. T2S will be a significantly IT- and labour-intensive project and the industry should already review the various investments at CSD and bank levels in order to avoid wasted investment.”
© 2008 funds europe