As noted by Reference Data Review earlier this year, the launch of the European Central Bank’s (ECB) Target2-Securities (T2S) project has been delayed by at least a year due to a “longer than expected” development phase. Hugh Simpson, senior advisor to the T2S programme from Bourse Consult, told delegates to last week’s Xtrakter user conference that new launch date will be September 2014, rather than the previously stated mid-2013. The industry consultation period may have been long enough to delay the launch, but have industry participants really considered the wide ranging impact of T2S and its related directive, including on the corporate actions process?
The incoming Securities Law Directive, which is to set the ground rules for the introduction of T2S and is due by the end of this year, is likely to be one of the most controversial issues for the post-trade space in 2010. Although the details have not yet been elaborated upon, it is aimed at introducing greater harmonisation across Europe, including allowing issuers to choose which central securities depository (CSD) they wish to use to make their announcements. This will add a more competitive element to the process, rather than using domestic CSDs as is the case now. This is likely to be one of the many challenging aspects of the introduction of T2S in the European market.
Overall, the run up to the launch of the new pan-European settlement system certainly hasn’t been smooth, given the fact the Bank of England is still deliberating its involvement in the project, for example. However, the project team has now taken on board all the industry feedback it has received and has duly factored this into the plans. The main focus of T2S remains unaltered in trying to achieve economies of scale by taking settlement out of the hands of individual CSDs and centralising it onto a common infrastructure across the European region, confirmed Simpson.
The T2S project team is currently focused on determining the costs for end users via the structuring of a tariff framework for T2S, as well as conducting ongoing discussions regarding governance. “There are three main elements to the future tariff structure that need to be determined,” explained Simpson. “The total envelope of costs is the first.” Because T2S is being built on a cost recovery basis, the team will need to determine estimates for the development, initial financing and running costs for the settlement system in order to figure out this number.
The tariff structure is close to being finalised, according to Simpson, as the team has already identified the basics of the charging structure and the relativities between the prices in a delivery versus payment framework. Another key number to be agreed upon in this process is the expected volume of trades to be settled via T2S in order to be able to work out how quickly costs can be recovered.
The governance aspects of the project planning phase obviously include the discussions with the Bank of England to determine whether sterling will join T2S (these have been ongoing for quite some time). Simpson noted that this decision would have a significant impact on the volumes processed by T2S overall but it will require convincing sceptics that processing costs will not be adversely affected in the UK and the central bank that it will have enough sway to influence the platform’s future direction.
However, from a reference data perspective, all of the discussions thus far have overlooked many of the important impacts that T2S will have on the post-trade landscape overall. Reference Data Review first examined the subject last year and a number of industry participants voiced their concerns about the impact of the settlement platform on the competitive environment in Europe in the space. CSDs are likely to be forced into adding value added services around corporate actions processing, for example, thus pitting them against banks and third party service providers already in this space.
At the Xtrakter event, Ilse Peeters, director of strategy and public affairs at international CSD Euroclear, confirmed the direction that is being taken to this end: “CSDs will need to adopt new business models and compete in new areas. The smaller CSD players are unlikely to survive in the long term.” She also noted that investments would need to be made so that corporate actions processing can be done for foreign securities outside a CSD’s traditional markets, as borders for settlement are broken down.
Peeters and other panellists noted that the introduction of the Securities Law Directive at the end of this year could prove challenging and threatening to all players in the post-trade space. “If the legislation makes it so CSDs have to be risk free then that will make life impossible,” she said.
Christian Krohn, director of regulatory policy at the Association of Financial Markets in Europe (AFME), added: “There is a lot of risk in directly regulating CSDs and this will have far reaching consequences in the market.”
Expect to hear much more on the directive as it materialises out of the regulatory ether over the coming months…