The European Central Bank’s (ECB) proposed Target2-Securities (T2S) project has faced more than its fair share of controversy since it was first announced in 2006, but what will be its likely impact on the data management community? Reference Data Review decided to ask a few industry participants about how they feel T2S will alter the data management landscape once it has launched in 2013.
T2S is basically aimed at providing a single, borderless pool of pan-European securities and a core, neutral, state of the art settlement process, says the ECB. Market users will be able to access these assets through their national central securities depositories (CSDs) but the aim is to take direct settlement out of the hands of these CSDs in order to benefit from economies of scale and drive down costs, according to the T2S project plans.
One of the consequences of inducing these CSDs to outsource the settlement part of their business is that settlement becomes split from areas relevant to reference data management, such as corporate actions processing. Göran Fors, global head of custody at SEB, reckons this may have practical and risk management implications and stresses that the market must monitor this closely during the launch stages of the project. Satvinder Singh, head of direct custody and clearing for EMEA at Citi Global Transaction Services, reckons that the effect of a lot of this harmonisation work will be similar to that of MiFID on the data space.
“MiFID led to many challenges with regards to client documentation requirements and these required a significant resource effort from all banks. Operationally, the issues are becoming even more complex due to the move to a pan-European market where coordination is key. We must be mindful of the unintended consequences of changes in the environment,” he warns.
Alan Cameron, head of clearing, settlement and custody client solutions at BNP Paribas Securities Services, agrees that competition and the wider changes across the clearing and settlement environment, including the Code of Conduct as well as T2S, will pose problems for data managers. “The rise of multiple trading and clearing venues has challenged those involved in obtaining valuations and maintaining static data,” he says.
As for the direct impact on the corporate actions space, Singh believes it may drive down costs via increased competition in this area. “Corporate actions will continue to be complex and manual but there will be more competition between CSDs because they will see their settlement volumes reduced. They will need to move up the value chain and this may put them into competition with banks,” he explains.
Paul Bodart, head of European Operations for Bank of New York Mellon Asset Servicing, reckons that as well as a period of competition and consolidation for CSDs, there will also be a consolidation of the banks that are in the custody business today, especially those that are only in one or two markets. “This is because margins will be under pressure and volumes will need to be large enough to justify staying in the business,” he adds.
In general though, Bodart is hopeful that T2S may drive some degree of harmonisation to be achieved in corporate actions data off the back of the project. It may therefore help spur the industry to adopt the standards being developed by the Corporate Actions Joint Working Group (CAJWG), of which Bodart is a member, in light of the general move towards a standardised approach in the post-trade environment.
Others agree that T2S may act as a catalyst for change in the securities market as a whole. Jean-Michel Loehr, chief industry and government relations executive at RBC Dexia, reckons it will strengthen the argument for a centralised data management solution to be introduced.
“The need for institutions to have a scalable data warehouse to record-order and disseminate both referential and transactional date is imperative, these need to be supported by robust processes to refresh and report,” he contends. “As noted by Committee of European Securities Regulators (CESR) and the ECB in their October 2008 consultation paper, there is a significant need to focus on standardising protocols in order to be able to effectively communicate with, and between, national clearing and settlement systems. So, data warehouses need to be constructed with these challenges in mind.”
BNP Paribas’ Cameron agrees: “A single settlement process is important to processing corporate actions and we hope it will also spur harmonisation in many aspects of custody, including corporate actions.”
Diana Chan, CEO of one of the newer players on the clearing block, EuroCCP, also feels the movement towards standardisation in the settlement environment will filter down into areas such as corporate actions. “Many corporate actions require a debit or credit entry to a securities account. Even though such movements are not typically categorized as ‘settlement’, they will need to be effected in the T2S environment. T2S will be a catalyst in implementing many of the agreed standards in Giovannini Barrier 3: the harmonisation of corporate actions processing,” she contends.
So, T2S will likely pose a number of competitive challenges to the market, which may in turn affect who offers what in terms of corporate actions data and processing services. It may also set the scene for further harmonisation of the market and give data managers some level of leverage to use to their own ends. Do you agree with our expert commentators? Do you see T2S as a potential data challenge or an opportunity?