The European Central Bank (ECB) has released its preliminary price estimates for settlement on its Target2-Securities (T2S) settlement system, due to be launched in September 2014, which indicate that if all 30 European central securities depositories (CSDs) join, settlement could be as low as 13 cents per settlement instruction. This will therefore essentially split the cost of corporate actions processing from securities settlement and put pressure on the CSD community to bring down the costs of processing of this data accordingly.
T2S will offer delivery versus payment (DvP) settlement in central bank money in several European currencies and is aimed at reducing the cost of this process to a minimum for the region by running on a cost-recovery basis. Accordingly, its revenues will be aimed at covering only the costs of developing and running T2S, and there will be no profit margin. Thus adding more pressure to the corporate actions segment of the business to rationalise costs and increase CSD’s profitability.
However, the prices for the ECB’s system will be heavily impacted by the geographical reach of T2S and the initial prices that have recently been released by the central bank are still under assessment. Assuming that the central banks of Denmark, Sweden and Norway, which have indicated their interest, authorise settlement of their national currencies in T2S, the settlement price would likely be 20 cents. If all of the 30 European CSDs that have signed the T2S memorandum of understanding join T2S, including the respective currencies, the fee for DvP settlement charged by T2S would be much less at 13 cents per settlement instruction.
The end price for DvP settlement to CSD customers will be the T2S fee plus the fees CSDs charge for their own additional services and communication charges. The size of these additional charges will depend on how CSDs reshape their own infrastructures.
These prices are based on the T2S programme board’s reassessed costs for the establishment of the settlement system. The board expects costs of €256.4 million for the development of T2S, and €50.7 million on average per year during the running phase on the side of the four central banks which will develop the T2S business application and operate T2S: Deutsche Bundesbank, Banco de España, Banque de France, and Banca d’Italia – jointly referred to as the “4CB”.
The costs on the side of the ECB, which supports the T2S programme board and coordinates the relations with internal and external stakeholders (including the Corporate Actions Sub-group (CASG)), are expected to amount to €90.2 million over the development phase and €9.3 million on average per year during the running phase. In addition, the T2S programme board currently calculates interest costs for the financing of T2S of €67.5 million and a contingency provision of €36 million to cover costs related to the maintenance of the system, minor changes and potential liability claims.
The central bank is keen to stress the efficiencies and cost saving potential of T2S and says the DvP settlement fee could potentially fall below 15 cents in the future. However, this is predicated on countries such as the UK joining the system.
All of this will therefore highlight the relatively high cost of corporate actions processing further, and will likely result in a push within the market to drive these costs down. There are also a whole host of technical challenges that must be navigated in order for the CSDs to interoperate effectively with T2S, including the adoption of new corporate actions standards.
The CASG has been liaising with a group of European CSDs to gather input into its work around assessing the potential corporate actions processing issues within the ECB’s T2S system. To this end, the group’s 21 members have agreed three areas of concern: the model for the cross border securities and cash distributions in the context of T2S; the use of T2S dedicated cash accounts for corporate actions cash payments; and the T2S night time sequencing for corporate actions instructing and processing.
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