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40 Financial Services Research July 2010 TARGET2-Securities TARGET2-Securities In 2006, the European Central Bank (ECB) announced plans to develop a centralised settlement solution for all euro- denominated securities transactions and all CSDs in the euro-area, with potential for non-euro area CSDs to join if demand exists (for background, see FSR, July 2007, pp 34- 51; FSR, Q3 2008, pp 32-47). In July 2008, the Governing Council of the ECB confirmed, on the basis of consulta- tion with T2S stakeholders, that it will proceed with the project build and it will extend the resources required for its completion. Subsequently 27 CSDs signed a Memorandum of Understanding in April 2009 declaring their support for the T2S programme and confirming – subject to appropriate contractual arrangements being agreed with the Eurosystem as owner and operator of the platform – that they would outsource securities settlement (for euro-denominated and some non-euro securities) to the T2S platform. TARGET2-Securities TARGET2-Securities Project Design: Project Design: A Progress A Progress Review Review A key milestone in the development of the TARGET2-Securities (T2S) project during the next 12 months will be the adoption of the Framework Agreement by the Governing Council in Jan 2011 and then by CSDs in April 2011. Bob Currie reports on advances in the project design and challenges in meeting the ECB’s proposed timeline, through which T2S will be ready to be used by the first group of CSDs by September 2014
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Target2-Securities Project Design: A Progress Review

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Bob Currie reports on advances in the project design and challenges in meeting the ECB’s proposed timeline, through which T2S will be ready to be used by the first group of CSDs by September 2014.
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Page 1: Target2-Securities Project Design: A Progress Review

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In 2006, the European Central Bank (ECB) announced plans to develop a centralised settlement solution for all euro-denominated securities transactions and all CSDs in the euro-area, with potential for non-euro area CSDs to join if demand exists (for background, see FSR, July 2007, pp 34-51; FSR, Q3 2008, pp 32-47). In July 2008, the Governing Council of the ECB confi rmed, on the basis of consulta-tion with T2S stakeholders, that it will proceed with the

project build and it will extend the resources required for its completion. Subsequently 27 CSDs signed a Memorandum of Understanding in April 2009 declaring their support for the T2S programme and confi rming – subject to appropriate contractual arrangements being agreed with the Eurosystem as owner and operator of the platform – that they would outsource securities settlement (for euro-denominated and some non-euro securities) to the T2S platform.

TARGET2-Securities TARGET2-Securities Project Design:Project Design:

A Progress A Progress ReviewReview

A key milestone in the development of the TARGET2-Securities (T2S) project during the next 12 months will be the adoption of the Framework Agreement by the Governing Council in Jan 2011 and then by CSDs in April 2011. Bob Currie reports on advances in the project design and challenges in meeting the ECB’s proposed timeline, through which T2S will be ready to be used by the first group of CSDs by September 2014

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However, an important step towards the fi nal T2S project design will come during the next 12 months, when the ECB Governing Council aims to clarify the project gov-ernance – as defi ned in the forthcoming Framework Agreement – and CSDs are asked to make a legally-binding commitment to the programme. Still, at this time, we note some uncertainty on the part of CSDs and users regarding the T2S governance, pricing and the terms on which they will outsource settlement functions to the T2S operator. As we note from the interview with Jean-Michel Godeffroy, Chairman of the T2S Programme Board at the European Central Bank (pp 34-9 in this issue), we can expect to see these de-tails clarifi ed by Q2 2011 in preparation for a fi rst wave of CSDs settling live trades via the T2S platform from September 2014.

Framework Agreement Indeed, the ECB indicates that a key mile-stone in the development of T2S will be the adoption of the Framework Agreement by the Governing Council in Jan 2011 and then by CSDs in April 2011. Jean-Michel Godeffroy reports that the ECB continues to negotiate the programme governance with key stake-holders, including central securities deposi-tories, central banks, national regulators and potential users of the system. This project presents some complex legal challenges, given that there have been few previous examples of situations where private sector companies have outsourced processing func-tions to a public authority. Some CSDs have maintained that the outsourcing contract should be a standard outsourcing agreement under private company law. The Eurosystem leans more towards a public task model. Godeffroy believes it important to fi nd a solution in the centre ground between these two positions, drawing on the strongest elements of each of these models. “All par-ties to the consultation have been open in sharing their priorities and concerns and we are confi dent that such a solution can be established in the timeframe we have pro-posed, whereby the Framework Agreement is scheduled for approval by the Governing Council in January 2011 and then put to the CSDs in April 2011,” he says.

Jan Lemeire, Director of Product Management at Euroclear, agrees that,

from a CSD standpoint, there is a need to fi nalise the legal contract that will specify the terms on which CSDs outsource set-tlement of securities transactions to the T2S platform. Alongside this, CSDs are seeking clarifi cation of the price schedule and service agreement that will be offered by the T2S operator. Lemeire points out that ongoing discussions relating to the terms of the outsourcing agreement remain confi dential at this stage between the CSDs and the Eurosystem. Within this debate, CSDs have sought to clarify whether the agreement will be a standard outsourcing arrangement under private company law, or whether this will take a different form given that CSDs will be outsourcing to a public authority. Most CSDs have taken the position that this should be a standard out-sourcing agreement under private company law. “As a CSD, the liabilities we bear in delivering settlement services to CSD par-ticipants will remain largely unchanged,” he explains. “However, we await clarifi cation regarding the level of liability that the T2S operator will bear in instance of technical or operational failures.”

Andreas Wolf, Chief Operating Offi cer at Clearstream International SA and Chief Executive of Clearstream Banking Frankfurt AG, reports that, from Clearstream’s posi-tion, the principal issues for attention have remained the same for some time. There is need to establish greater clarity around the governance framework for T2S and particu-larly to clarify the terms on which CSDs will outsource securities settlement to the T2S platform. Wolf notes that for Clearstream Banking Frankfurt, for example, further detail is required in this area to ensure that it can maintain its service commitments to CSD participants and that it meets its regu-latory obligations as CSD and as a licensed credit institution regulated by the German Banking Act. Second, the pricing schedule for T2S still has not been announced. Stakeholders require a detailed breakdown of the pricing model offered by T2S in order to make an accurate assessment of the T2S business case and the potential cost savings offered by the platform.

John Gubert, External Advisory for Unicredit Global Securities Services, asserts that

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the fi rst step in tabling the Framework Agreement will be to defi ne the business and technical specifi cations that will guide the operation of the T2S platform. This process, he anticipates, is likely to proceed relatively smoothly: the core functional content of the T2S project has been mapped out and the next stage is to clarify the detail around these core principles. Though not all T2S stakeholders will agree precisely on the form that these functional specifi cations should take, Gubert predicts that we are likely to see a workable solution set in place without signifi cant delay to the project timeframe.

The task of defi ning the contractual arrangements that will guide the T2S project is destined to be more complex. The T2S platform will be owned and operated by the Eurosystem. However, discussion is ongoing regarding the contractual arrangements through which CSDs will outsource transac-tion settlement to T2S and the degree of liability that the T2S operators will bear in instance of technical or operational failure. The ECB has indicated in earlier public statements that it does not view T2S as a conventional outsourcing contract under pri-vate company law – and, by implication, the Eurosystem may be unwilling to take on the liabilities that typically would be borne by a supplier in an outsourcing agreement.

In considering the governance around the T2S project, KAS Bank’s Director of Securities Services Henk Brink observes that the primary stakeholders each have slightly divergent interests. The Eurosystem, as owner and operator of the platform, aims to deliver a smooth and effi cient imple-mentation of the project, but is also keen to recover its investment and has specifi ed that the project be built on a full cost re-covery basis. CSDs are seeking reassurance that they will be able to maintain effi cient management of customer accounts when securities settlement is outsourced to the T2S platform. Also, CSDs seek confi rmation that they will not be exposed to additional risk or liability resulting from technical or operational failure at the T2S platform.

In turn, central banks seek assurance that procedures for CeBM settlement via the T2S platform are robust and that the

project will not in any way compromise their oversight of currency or monetary policy operations.

From a user perspective, KAS Bank’s Brink indicates that users are pushing for an effi cient and stable service at an appro-priate price. “That is a mantra that we push constantly through consultation forums in which we are active,” says Brink. “Along-side other stakeholders, we also seek clari-fi cation around the development strategy for the T2S project, how this will be funded and the degree to which this may infl uence our future ability to innovate.”

FSR asked Henk Brink whether these con-sultation forum are providing an effective avenue through which users can articulate their needs and concerns? “Proof of this will come when the project is delivered,” he responds. “We take advantage of the prin-cipal avenues available to us – including our National User Group. We also discuss these issues in our regular meetings with the regulators in order to provide input to the consultation process. The ECB has assured us that it understands our needs as users of the system. But ultimately this will only be verifi ed when we see the fi nal design of the platform and have a clear idea of how well the operating model matches up against the effi ciency benefi ts that were promised to us when the project was announced. In particular, we will monitor the liability para-graphs in the Framework Agreement closely in order to see how much liability will be borne by the T2S operator in instances of technical failure and how much risk and liability will be passed through to the CSDs and their users.”

“If technical problems are experienced with the T2S platform, it is crucial that we know on which doors to knock in order to seek redress,” explains Aletta Oostenbrug, Senior Business Consultant at KAS BANK. “Equally importantly, we must ensure that we will not be required to bear liability for any operational problems that we as users have not caused and over which we have no direct control.”

Unicredit External Advisor John Gubert observes that the Eurosystem will bear

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considerable reputational risk as owner and operator of the T2S platform and this in itself will provide a strong incentive to en-sure that the project is operationally robust and technically resilient. “We cannot afford any outages!” he emphasises. However, the level of fi nancial liability borne by the Eurosystem still needs to be confi rmed. Sev-eral competing scenarios appear possible. The Eurosystem might bear full liability for any losses incurred as a result of technical or operational failures on the platform. Alternatively, the Eurosystem may refuse to bear any liability for losses on the platform, such that this risk is carried by CSDs – and ultimately this may be passed through to CSD participants and, potentially, on to the end investor. Or, thirdly, the Eurosystem might bear limited liability, such that its risks are capped at a pre-defi ned level, with any additional losses borne by the CSDs and potentially passed through to their users.

For Gubert, the third option appears to offer an acceptable solution. Indeed, there is precedent for such a scenario. He believes it appropriate that the ECB, through the Eurosystem, should bear some fi nancial risk if the T2S platform experiences technical failure or fails to meet operational requirements. CSDs are typically lowly capitalised compa-nies that are fundamental to the secure and effi cient functioning of capital markets. Thus, CSD participants will be reluctant to see CSDs taking on signifi cant liability through the outsourcing contracts that they sign with the T2S operator. In turn, investors may be reluctant to put up capital, or commit to putting up future capital, to cover this risk at the CSD, given the limited return that this capital commitment is likely to generate.

Looking historically, a comparable debate took place in the UK post-trade arena

during the 1990s when establishing how much liability should be borne by CRESTCo in managing settlement of UK-listed securi-ties on the CREST platform. In this instance, CRESTCo came to an arrangement with CSD participants whereby it assumed an aggregate £20 million (later raised to £40 million) initial liability against any single event of system failure, with any additional liability borne by users of the platform. However, that liability was limited to acts of negligence, wilful default and fraud.

But does the proposed T2S governance offer freedom for a CSD to employ alterna-tive settlement provision, should the out-sourced service offered by T2S fail to meet with required standards? Clearstream’s Andreas Wolf responds that under an inte-grated CeBM model as currently run in the Euroclear ESES markets – whereby a central bank agrees to outsource the technical op-

eration of some of its accounts to the CSD, enabling the CSD to move central bank money from one member account to an-other as payment for delivery of securities – this will not be possible anymore. How-ever, the Economic and Financial Affairs Council (EcoFin) has concluded that there must be competition in a T2S world which can then only take place in an interfaced CeBM model. And in offering central bank money settlement under such an interfaced model, it seems possible that any CSD could retain its existing settlement system in the background and bring this into operation if and when required. This will enable CSDs to retain a contingency provision, should any operational diffi culties develop with the T2S platform.

Florence Fontan, Head of Public Affairs at BNP Paribas Securities Services, is clear that

Andreas Wolf,COO Clearstream International SA and CEO Clearstream Banking Frankfurt AG

This project presents some complex legal challenges, given that there have been few previous

examples of situations where private sector companies have outsourced processing functions to

a public authority. Some CSDs have maintained that the outsourcing contract should be a standard

outsourcing agreement under private company law. The Eurosystem leans more towards a public

task model.

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the drafting process for the Framework Agreement must adhere to a strict time-table and must be brought to a prompt conclusion in order to sustain the mo-mentum that has been established behind the T2S project. The Framework Agreement will defi ne the relationship between CSDs and the T2S operator, along with linkages with central banks in order to support CeBM settlement of securities transactions. Fontan believes it important that these arrangements have suffi cient fl exibility to accommodate any signifi cant changes or contingencies that might materialise as the T2S platform is built and delivered. In tabling this agreement, Fontan deems it essential that users are fully involved in shaping the project governance and that they have right of veto to ensure that there is no slippage from the user requirements that were frozen by the T2S Programme Board in January 2010. This is important

in order to ensure that T2S delivers its intended benefi ts to users of the platform. “In driving this process, we are aware that some CSDs are still uncomfortable with the prospect of outsourcing settlement of euro-denominated, and potentially some non-euro denominated, securities to T2S,” she says. “But it is important that this unease on the part of some CSDs does not obstruct the T2S project design and implementation. Thus it is crucial in tabling the Framework Agreement that we retain clear sight of general harmonisation principles that overarch the programme. CSDs must not be allowed to obstruct the project by challenging small details within the Framework Agreement in order to avoid the need to change their operating models or to decommission existing settlement platforms.”

Specifi cally, some CSDs have requested de-tailed explanation of the outsourcing rela-

tionship with the T2S operator and the level of liabilities they will bear in instances of operational failure at T2S. However, Fontan contends that CSDs bear only limited liability to their CSD participants – for ex-ample, Euroclear Belgium, Euroclear France and Euroclear Nederland provide only a lim-ited liability to CSD participants if there is a failure on the ESES settlement platform – and she believes there is no reason why the T2S operator should offer higher levels of liability to the CSDs than the latter extend to their own CSD participants. “On balance, CSDs must not be allowed to enter into detailed debates around risk and liability simply to delay the project,” she says.

Separate legal entityAt the T2S Advisory Group meeting in De-cember 2009, there was extensive discus-sion around the appropriate governance of T2S both in the development phase and

in the live phase. Early on in the project, some stake holders raised the question of whether T2S should become a separate legal entity for governance purposes and, indeed, EcoFin in its meeting in February 2007, suggested such an arrangement might be explored. As a result, the AG agreed to set up a task-force to look into what the potential objectives and approach of such an entity might be. The Chairman, Jean-Michel Godeffroy, asked Marye Humphery, Advisor to Morgan Stanley, to chair that task force.

Marye Humphery explains that there are strong views both for and against the idea of a separate legal entity. The most impor-tant point, she notes, is that this exercise is part of a process to develop the best pos-sible governance model for T2S. A separate legal entity is just one possible approach. “We should be working towards a solution that will allow T2S to deliver its full promise

Henk Brink, Director of Securities Services, KAS BANK

If technical problems are experienced with the T2S platform, it is crucial that we know on which

doors to knock in order to seek redress. Equally importantly, we must ensure that we will not be

required to bear liability for any operational problems that we as users have not caused and over

which we have no direct control.

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and potential, which is to provide seamless, effi cient, low-cost domestic and cross-border settlement capability for Europe,” she says. “The governance model should not only be about the project as it is now: it should be suffi ciently fl exible and robust to cope with the strategic developments of the future. We do not know how Europe is going to develop during the next three years before T2S is delivered, let alone during the next 10; the only thing we know for sure is that change will continue apace.”

Reporting back on these deliberations, the ECB’s Jean-Michel Godeffroy indicates that Marye Humphery presented a well bal-anced report to the T2S Advisory Group in December 2009 that summarised key posi-tions regarding the creation of a separate legal entity. During these negotiations, some non-euro central banks declared their support for an SLE, believing that this frame-work would allow them greater infl uence over the future direction of the T2S project. In turn, some users of the system appeared to support an SLE on the grounds that this would provide the best means through which they could persuade non-euro central banks to commit to T2S. In contrast, a number of euro-currency central banks were fi rmly opposed to the creation of an SLE, perceiving that the Eurosystem is taking on considerable responsibility as owner and operator of the T2S project and wishing to ensure that the ECB Governing Council re-tains full responsibility for services provision.

“On balance, we concluded within the AG that there was little unconditional support for the creation of a separate legal en-tity,” explains Godeffroy. In its April 2010 meeting, the Governing Council requested that the Programme Board will continue the elaboration of the T2S governance in

the running phase without contemplating the setting up of a separate legal entity, but with the intention to fi nd appropriate ways to involve CSDs and non-euro central banks. “We are confi dent that the views of non-euro central banks will be well heard under the framework we are proposing to them,” he says.

Clearstream has remained neutral on the question of whether a separate legal entity should be established, believing this to be

an internal question for the Eurosystem and one that will not change the external gov-ernance of the project. The ECB Governing Council confi rmed in 2007 that the T2S project will be fully developed and oper-ated by the Eurosystem and there will be no direct involvement by private companies in the design, build or operation of the project, other than in an advisory capacity. In this context, Andreas Wolf notes that there is limited value in establishing a separate legal entity to govern the activities of T2S, given that this entity would re-main subject to the decision making of the Eurosystem and therefore to the ECB Governing Council.

BNP Paribas’ Florence Fontan notes simi-larly that the general principles for the T2S project, which were approved and published by the ECB Governing Council in April 2007, established that the Eurosystem will take on responsibility for developing and operating T2S by assuming full owner-ship. Consequently, whatever governance structure is set in place to guide the day-to-day operation of T2S, ultimate decision making power will lie with the Eurosystem. As such, it is not clear whether the separate legal entity model can work. “Nevertheless we agree we need fi nancial transparency

The mutualisation delivered by T2S will bring major efficiency benefits, in terms of reduced

settlement costs and reduced cost of systems adaptation, regardless of whether it embraces

GBP-denominated (and other non-euro denominated) securities. This position is substantially better

than the existing status quo – the highly fragmented environment that we are forced to work in

currently.

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and this can be delivered by a separate legal entity or by specifi c accounting within the same legal entity,” she says. “Hence we remain agnostic to this development, believing that it will be possible to deliver fi nancial transparency without the need to establish a separate legal entity.”

A higher priority, suggests Fontan, is the need to streamline decision-making chan-nels that enable stakeholders to infl uence the T2S design and operation. “During the project mode, we currently have a six-monthly meeting with the ECB Governing Council in order to provide our input into the design process,” she explains. “How-ever, when the platform becomes opera-tional, it is vital that a more effi cient and responsive decision making process is set in place such that we can react promptly to any operational diffi culties or shortcomings in the project design.”

Unicredit External Advisor Gubert does identify certain benefi ts deriving from the corporate structure that a separate legal entity might offer. Under this arrangement, a Board of Directors will be responsible for day-to-day governance issues associated

with the T2S platform. The ECB will serve as facility manager for the T2S project, in a similar way that Morgan Guaranty used to serve as facility manager for Euroclear in the period after its inception. However, at this stage there appears to be limited appetite from key T2S stakeholders (mainly ECB and the NCBs) for such a corporate structure and this appears unlikely to secure approval. Whatever governance model is adopted by the T2S project, notes Gubert, the key is to ensure that users are involved actively in the design and operation of the platform. There must be a single line of

command to guide the day-to-day opera-tions – and it is logical that this should lie with the ECB, given its position at the heart of Eurosystem which is the owner and op-erator of the T2S platform.

Full cost recoveryT2S is being designed and built on a “full cost recovery” basis. This raises important questions regarding the economic implica-tions of T2S for participating CSDs and other key T2S stakeholders in Europe. Will stakeholders realise the cost savings that were forecast in early economic impact as-sessments for T2S? Or might T2S implemen-tation translate into a major overhead that Europe’s fi nancial services industry will be paying off for years to come – resulting in higher, not lower, overall cost of processing securities transactions? Hugh Sachs Simpson, ECB Senior Consultant, forecast in 2008 that in a low volume case, where only half of eurozone securities transactions are settled through T2S, then T2S costs will be approximately !100 million and user savings approximately !40 million. In a high volume scenario, involving all eurozone settlement transactions plus GBP, CHF, DNK and SKK

transactions, the predicted cost of T2S will be !140 million and market savings would be expected to be !110 million (see FSR, Q3 2008, p 44).

For Ulf Noren, Global Head of Sub- Custody Client Relations, GTS Banks at SEB Merchant Banking, pricing issues remain fundamental to the success or failure of T2S. ECB repre-sentatives have indicated that T2S pricing might be !0.15 - !0.25 per transaction and have questioned whether a !0.05 or !0.10 difference in the settlement cost will make a big difference to users of the system.

Jan Lemeire, Director, Product Management, Euroclear

Now is the time for agent banks and CSDs to seize the opportunity to make the next stage of the

business case to the user community. It is time for incumbents and new entrants to volunteer

proposals for lower fees and improved market efficiency. Why does this matter? Because lower fees

increase liquidity, minimise market impact and, ultimately, improve investment performance for

issuers and end investors.

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“The answer is yes, the difference between a !0.15 fee and a !0.25 fee per transac-tion will matter greatly to us,” he responds. “Moreover, we are uncertain at this stage whether this will represent the end fee paid by the CSD participant for transac-tion settlement, or whether this will be the charge paid by a CSD to outsource securities settlement to the T2S platform. If the latter, we can expect additional cost to be added by the CSD to cover data storage, the need to maintain client service staff to support transaction settlement, and so on. In short, until we have clear indication of the prices that we will pay ultimately to each CSD for settling transactions in a T2S environment, it is diffi cult for us to advance further with our strategic planning. Any differences in pricing between participating CSDs will be important in determining how we process settlement fl ow and, more broadly, how we structure our multi-market service offering.”

KAS BANK’s Henk Brink suggests that the business case advanced in the T2S Economic Feasibility Study looked promising when this was fi rst published. This referred to cross-border settlement via the T2S platform potentially being offered at 90 per cent lower fees. However, these estimates were based on 2007-8 settlement volumes and inevitably the global fi nancial crisis has caused settlement activity to drop off signif-icantly since this business case was drafted. Moreover, he believes it diffi cult to make a rigorous cost-benefi t analysis of the T2S programme until we have further indication of which CSDs will outsource to the T2S. If settlement of GBP-denominated securities through Euroclear UK & Ireland is out-sourced to the T2S platform, for example, this will substantially improve the scale ben-efi ts extended by the platform. However, UK participation is far from certain.

T2S is being designed as a lean settlement system to which CSDs intend to outsource settlement of euro-denominated, and perhaps other, securities transactions. However, Euroclear’s Jan Lemeire is em-phatic that most CSDs will need to retain a large part of their core settlement systems, and will only be able to decommission a small segment of them once T2S goes live because these systems are required to support other processing activities. A lean T2S means that market-specifi c processing services, such as stamp duty collection, registrations, physical security deposits/withdrawals, trade confi rmations, among other functions, will remain on the CSD legacy platforms. In addition, as originally expected, the CSD legacy systems will serve as platforms for added-value CSD services, such as collateral management and other asset servicing functions, which rely on core settlement functionality and/or results.

Unicredit’s John Gubert also questions how far CSDs will be able to realise signifi cant cost savings by decommissioning their existing settlement platforms. Some CSDs, especially those that are part of the two major ICSD groups, will need to retain their existing settlement systems (either in full or in part) in order to support settlement of non-euro denominated securities, or to sus-tain data management required by CSDs to deliver value-added services to their users. Though some CSDs operate modular sys-tems that will enable parts of their settle-ment infrastructure to be decommissioned, the legacy settlement infrastructure that other CSDs have in place does not offer this level of fl exibility. Consequently, they will be forced to retain the existing legacy technology, or to engage in costly platform upgrades in order to support users’ needs in a T2S environment. Though the headline

Florence Fontan, Head of Public Affairs, BNP Paribas Securities Services

It is appropriate that the ECB, through the Eurosystem, should bear some financial risk if the T2S

platform experiences technical failure or fails to meet operational requirements. CSDs are typically

lowly capitalised companies that are fundamental to the secure and efficient functioning of capital

markets. Thus, CSD participants will be reluctant to see CSDs taking on significant liability through

the outsourcing contracts that they sign with the T2S operator.

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fi gure for the T2S build is in the region of !250 million, Gubert suggests it is likely that aggregate cost to the marketplace will be well in excess of this fi gure, potentially !750 million to !1000 million.

In assessing the T2S business case, KAS BANK’s Brink underlines the need to look beyond the immediate technical functions delivered by the T2S platform. The future effi ciency of securities processing in Europe will be contingent also on the industry’s ability to harmonise market practice, legal and fi scal arrangements across multiple European markets. If we are still confronted with market-specifi c requirements such as Stamp Duty Reserve Tax in the UK or regis-tration references in the Spanish market, for example, this will compromise the potential

for a T2S platform to push down the price of cross-border settlement in Europe to a level comparable to that for settlement of domestic transactions.

Euroclear’s Jan Lemeire is confi dent that, in the longer term, T2S may encourage further market-practice harmonisation across markets in the post-trade environment and it may enable CSD participants to employ more effi cient back offi ce operations. Le-meire points out that Euroclear has already played an active role in driving harmonisa-tion of market practices, and fi scal and legal arrangements in Belgium, France and the Netherlands in preparing for the launch of ESES, and in other Euroclear group markets for the Single Platform. However, he recog-nises a danger that some CSDs may wish to limit harmonisation in order to protect their existing franchises, making it diffi cult for an investor CSD to offer a service that is as effi -

cient as that offered by the local issuer CSD. Thus, Lemeire believes it important that T2S stakeholders work collectively to eliminate inconsistencies in market practices and to ensure that full interoperability is achieved in T2S between CSDs, including those that are part of vertical silos. This collective effort is important to ensure that T2S delivers the full effi ciency benefi ts and cost savings that have been targeted since the project’s inception.

At this time, there is still is conjecture around whether the Bank of England will commit settlement of GBP-denominated securities that are settled in Euroclear UK & Ireland to the T2S platform. Florence Fontan indicates that, as a user of the system, BNP Paribas Securities Services would welcome the major scale benefi ts and opportunities

for mutualisation that this will deliver. This said, she is confi dent that T2S will bring signifi cant opportunities for mutualisation regardless of whether the UK decides to join. “BNP Paribas Securities Services is a CSD participant in multiple CSDs across Europe,” she explains. “This demands that we constantly update our internal opera-tions and technology to accommodate tech-nical and procedural changes across each of these CSDs.”

Consequently, she believes that the mutu-alisation delivered by T2S will bring major effi ciency benefi ts, in terms of reduced settlement costs and reduced cost of systems adaptation, regardless of whether it embraces GBP-denominated (and other non-euro denominated) securities. “This position is substantially better than the existing status quo – the highly fragmented environment that we are forced to work

Dr Robert Barnes, Managing Director for Equities, UBS Investment Bank

Some CSDs are still uncomfortable with the prospect of outsourcing settlement to T2S. But it is

important that this unease on the part of some CSDs does not obstruct the T2S project design

and implementation. Thus it is crucial in tabling the Framework Agreement that we retain clear

sight of general harmonisation principles that overarch the programme. CSDs must not be allowed to

obstruct the project by challenging small details within the Framework Agreement in order to avoid

the need to change their operating models or to decommission existing settlement platforms.

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in currently,” she asserts. “We note, for example, that it has taken Euroclear group almost 10 years to deliver the ESES project that centralises securities settlement for the Belgian, Dutch and French markets onto a single platform. T2S will accelerate the rate at which we can realise effi ciency benefi ts – and we must strive to optimise these gains through pushing volume through the platform and extending the range of instru-ments that it can support.”

Currency Participation AgreementAnother major activity for 2010 is negotia-tion of the Currency Participation Agreement (CPA) with non-euro area central banks that anticipate allowing their currencies to be settled in T2S. Jean-Michel Godeffroy, Chairman of the T2S Programme Board, observes that from early July the ECB will be in a position to fi rm up the contractual arrangements that will underpin the CPA with non-euro central banks (see pp 36-7).

Consultation with these central banks has been ongoing for some time. “However, in preparing the project schedule we recog-nised that negotiations around the Frame-work Agreement would require consider-able time, given that the Eurosystem would need to negotiate terms of the Framework Agreement with the CSDs and the CSDs would then require time to secure approval from their national regulators and to ensure they have the support of CSD participants,” he says. “With this in mind, we were eager to expedite work on the Framework Agreement and, when this was well on track, to accelerate our work on the CPA.”

In preparing the Currency Participation Agreement, the ECB is negotiating with non-euro central banks that fall broadly into

two categories. For the Bank of England, the Swiss National Bank and a number of central banks in the Nordic region, for example, the question is principally whether or not they will bring their currency on board to support CeBM settlement in T2S. Other central banks (including central banks in Poland, Hungary, Romania and the Baltic states among others) face the additional challenge that they are preparing for adop-tion of the euro as their offi cial currency and, in parallel with this, they are reviewing whether they will link to the T2S platform. In light of this, the ECB expects to host two distinct sets of discussions with the central banks that fall into these respective catego-ries. “We are confi dent that preparatory discussions in each of these categories have been progressing well,” says Godeffroy. Central banks are weighing up the implica-tions for the domestic and international banking industry of seeing settlement of euro-denominated and non-euro securities in the T2S platform.

Multi-market asset servicingT2S is likely to transform the way that many global custodians and global broker-dealers do business – providing the foundation for a less fragmented, more effi cient market and providing a facility that will pool settlement liquidity across multiple European markets under one roof. A primary consideration is that the launch of the T2S platform is likely to prompt a separation of transaction settlement and asset servicing. Paul Bodart, Head of EMEA Operations at The Bank of New York Mellon explains that, at the cur-rent time, BNY Mellon typically processes its transaction settlement and asset servicing activity through the same provider in mar-kets in which it employs a sub-custodian. However, the launch of the T2S platform will prompt the bank to re-evaluate its busi-

Pricing issues remain fundamental to the success or failure of T2S. ECB representatives have

indicated that T2S pricing might be !0.15 – !0.25 per transaction and have questioned whether a

!0.05 or !0.10 difference in the settlement cost will make a big difference to users of the system.

The answer is yes, the difference between a !0.15 fee and a !0.25 fee per transaction will matter

greatly to us.

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ness model. “We are likely to connect di-rectly to T2S in order to manage transaction settlement internally for euro-denominated and selected non-euro securities that are supported by the T2S platform,” he com-ments. “In some markets, we will continue to employ the services of a sub-custodian in order to meet our requirement for corporate actions processing, tax administration, proxy voting services and other key asset servicing functions. In other markets, we may elect to dispense with the services of a local agent and to handle our asset servicing require-ments internally.”

With these challenges in mind, BNY Mellon is conducting a detailed assessment of its securities processing requirements across European markets in order to identify how it can reap maximum benefi t from the release of T2S. “This project will evaluate the ability of sub-custodians to meet our processing requirements and at what cost,” says Bodart. “On a market-by-market basis, we will also review how we will structure these processing arrangements.”

Dr Robert Barnes, Managing Director for Equities at UBS Investment Bank and Chief Executive of UBS MTF, proposes that T2S will serve as a catalyst to reduce post-trade costs and harmonise process in European securities services. Now, he suggests, is the time for agent banks and CSDs to seize the opportunity to make the next stage of the business case to the user community. It is time for incumbents and new entrants to volunteer proposals for lower fees and improved market effi ciency. Why does this matter? Because lower fees increase liquidity, minimise market impact and, ultimately, improve investment performance for issuers and end investors. And the will-ingness of CSDs and agent banks to listen and respond to this request is evidence of their commitment to promote best prac-tice and is central to the growth of market liquidity across Europe (see pp 62-3).

Barnes believes that T2S offers potential to enable settlement providers to operate across a pan European level, rather than just a national level, for those aspects of the settlement process not constrained by domestic legal and fi scal differences. Cur-

rently, UBS Investment Bank employs nine agent banks to service settlement with 27 CSDs across Europe. With T2S, UBS may look to reduce the number of agent banks it employs down to two or three across these 27 markets, and agents will also have opportunity to capture new business as more countries enter the European Union or the T2S model expands world-wide.

In the face of these developments, sub- custodians and CSDs will be forced to review the range of services that they offer and their opportunities for generating revenue. Some level of consolidation in both of these market segments is a likely outcome.

Indeed, with the release of a T2S platform, CSDs are being invited to outsource settle-ment of euro-denominated (and potentially some non-euro denominated) securities to the T2S platform, along with some of the data management responsibilities sitting around this function. This will leave CSDs principally with an asset servicing role, along with limited client service responsibili-ties in supporting the settlement fl ow from CSD participants that is outsourced to the T2S platform. The ECB has proposed that CSDs expand their role and cover pan-T2S securities rather than just their domestic ones. However, Unicredit’s John Gubert points out that few CSDs have past experi-ence in delivering multi-market settlement or asset servicing – and many CSDs (espe-cially those that are outside the major ICSD groupings) will struggle to make the invest-ments required to develop a credible service offering in this area. Moreover, CSDs are being asked to position themselves in a space which overlaps only weakly with the needs of the global investor – many of whom are seeking a service intermediary to support their cross-border investment activity worldwide, rather than a provider that can only support this activity across a limited number of European markets.

Some commentators have suggested that CSDs might respond further to these chal-lenges by establishing themselves as banks. But Gubert believes that in many cases this proposal is unrealistic. This demands that CSDs raise additional capital to cover new commercial risks – and, in order to generate

Jean-Michel Godeffroy, Chairman of the T2S Programme Board, European Central Bank

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a return on this capital, they may be forced to take on higher risk commercial activities which may be incompatible with the tra-ditional risk-profi le of a CSD or the prefer-ences of CSD participants.

According to some estimates, certain European CSDs may lose 30-40 per cent of their existing revenue stream when T2S goes live. Consequently, notes KAS BANK’s Henk Brink, these organisations will be under pressure to compensate for this loss of revenue – and, in response, they will explore opportunities to extend the range of value-added services that they offer to customers. For KAS BANK, this development does not come as a sudden surprise. “This move has been on the cards for a number of years and is one that CSDs and ICSDs have discussed with their users,” he says. “In response, we recognise the need to sharpen our service offering and to continue to innovate in order to stand out from the crowd. Of course, this is something we have been doing for more than 200 years, and is an area where we are accustomed to adding genuine value. This said, as multi-market specialists in the asset servicing space, we are also aware that it has taken many years of experience and invest-ment to build the high-quality value-added services that we currently offer at KAS BANK. In contrast, many CSDs presently lack this expertise and will not be in a position to compete effectively in this asset servicing space when T2S goes live.”

To compete effectively in the asset servicing arena, CSDs must be able to handle the full range of complex service provision that is currently offered by leading multi-market securities services providers in Europe. BNP Paribas Securities Services’ Florence Fontan believes it is questionable whether buyers will appoint CSDs to meet their full asset servicing requirements when these CSDs have limited experience in this area and may only be able to meet the rudimentary needs of the customer. With the launch of T2S, CSDs may want to compete in a demanding commercial environment for value-added services and she predicts that some may struggle to develop a credible service of-fering that can match the high standards on offer from other specialist providers in the market.

Price dynamicsNetwork managers have raised the ques-tion of whether T2S may deliver a zero-sum outcome in terms of sub-custodian pricing. Facing a decline in settlement-based rev-enue in a T2S environment, sub-custodians may be forced to revise upwards what they charge for asset servicing functions. Responding to this point, the ECB’s Jean-Michel Godeffroy is confi dent that T2S will bring more than a zero-sum outcome because it will deliver signifi cant general benefi t for the market in terms of pricing and effi ciency. “However, we recognise that T2S will not benefi t all stakeholders equally,” he says. “Those that embrace T2S as a business opportunity will gain competi-tive benefi t when T2S goes live. However, we recognise that in the name of opera-tional effi ciency and market harmonisation, inevitably some market participants will be better placed than others to commit the investment and expertise needed to thrive in this new environment.”

BNY Mellon’s Paul Bodart expects pricing to drop overall with the launch of T2S. But the early messages emanating service providers is that buyers should not expect to see major reduction in overall supplier cost at current levels of processing ac-tivity. Sub-custodians will need to invest to redesign their service capability for a T2S Europe – and, when the T2S platform goes live, they will expect to be well remuner-ated for servicing high-risk elements of the securities transaction lifecycle (for example in processing corporate actions) without the benefi t of stable revenue fl ow coming from transaction settlement.

This said, BNY Mellon currently employs 17 sub-custodians in Europe to support its cross-border activity in 27 markets. With T2S, Bodart suggests that the bank may consolidate its network support across these 27 markets down to a smaller number of sub-custodians. “In these circumstances we would expect to realise scale discounts from these service providers owing to the additional volume of business that we will bring to them across their pan-European service offering,” he says.

Andreas Wolf confi rms that Clearstream is

Ulf Noren, Global Head of Sub-Custody Client Relations, GTS Banks, SEB Merchant Banking

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fi rmly committed to T2S. “We made this clear by being the fi rst CSD to sign the Memorandum of Understanding with the Eurosystem in July 2009,” he says. However, he believes that several questions need to be resolved before, as a CSD, Clearstream can take a decision to sign a legally-binding contract to outsource settlement activity to T2S. One is the detailed pricing schedule in euros that will apply to CSDs that enter into such an outsourcing agreement and how this will be contingent on settlement volumes processed by the platform. Though the Eurosystem has announced a price guar-antee for the fi rst two years of T2S’ opera-tion, Clearstream has pressed for this price guarantee to be extended to ensure that it does not carry volume risk in the early stages of T2S operation. In the absence of this guarantee, CSDs may face a sharp rise in the cost of outsourcing settlement to

T2S if the platform fails to attract a critical volume of settlement activity.

The Eurosystem has stated that T2S will reduce prices for cross-border settlement. However, Clearstream’s Wolf points out that a major share of transactions proc-essed through CBF and many other Euro-pean CSDs are domestic – and, given the relatively low cost of domestic settlement, many T2S players wonder whether T2S will deliver signifi cant overall cost savings. This very question has been raised in T2S consultation on several occasions, refl ecting concerns of CSD participants that the design and operation of T2S will present a sizeable overhead that Europe’s fi nan-cial services industry may be paying off for years to come – resulting for a time in higher, not lower, overall cost of processing

securities transactions. “At this stage, we still do not have suffi cient information around the detailed price schedule and projected settlement volumes to provide an unequivocal answer to this question,” adds Wolf. “The T2S Advisory Group has been informed that it will receive further information on the pricing schedule to be applied by T2S. However, as yet, this infor-mation has not been forthcoming as a price list in euros. More generally, Clearstream has requested that it be represented ef-fectively in the external governance of the T2S project, with effective input into the change management process after the sig-nature of legally binding contracts. When these dual concerns have been addressed, we are likely to be better placed to affi rm our fi nal and legally binding commitment to the project and to commit necessary investment.”

With the T2S platform in place, securities settlement in many European markets will be heavily commoditised. Hence, CSDs will need to look for alternative revenue sources further up the value chain, en-suring that they can service a range of markets as an investor CSD rather than simply focusing on their own domestic market as an issuer CSD. However, with 27 CSDs now having signed the Memorandum of Understanding with the Eurosystem, Euroclear’s Jan Lemeire feels it unrealistic that each of these CSDs will be able – and even allowed by their owners – to move up the value chain and to sustain a viable business by competing for asset servicing revenues. Inevitably, some CSDs will be better positioned than others to take this step. “At Euroclear, we intend to leverage T2S as fully as possible in order to be the

Some users may elect to link to T2S directly via direct connectivity arrangements. However, we

question whether the potential benefits will warrant the cost and complexity of establishing a

direct technical link into T2S. For prestige reasons, some prominent players have indicated that they

may connect directly as soon as the T2S platform goes live. However, others may prefer to wait until

the project is bedded in and necessary refinements have been made to the platform.

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leading provider of post-trade services in Europe,” he says. “Given that it is in the plan of T2S to improve interoperability between European CSDs, its launch is ex-pected to facilitate our strategic ambitions in this area.”

SEB’s Ulf Noren believes it likely that we will see change in the services delivered by CSDs in a T2S world. Under the Securities Law Directive, CSDs may be authorised to acquire a limited purpose banking licence in order to deliver a specifi ed range of banking services. From SEB’s viewpoint,

this ‘limited purpose’ banking licence will enable a CSD to deliver many of the serv-ices currently offered by a sub-custodian, including securities lending and borrowing facilities and the provision of credit. By implication, this will have a major impact on the competitive landscape for delivering securities services in Europe.

For users, the T2S project poses important questions regarding how best to connect to the T2S platform. Some may elect to link directly via direct connectivity ar-rangements. However, Unicredit External Advisor John Gubert questions whether the potential benefi ts will warrant the cost and complexity of establishing a direct technical link into T2S. For prestige reasons, some prominent players have indicated that they may connect directly as soon as the T2S platform goes live. However, others may prefer to wait until the project is bedded in and necessary refi nements have been made to the platform.

Gubert explains that, for Unicredit, the key is to support the bank’s global custodian

and domestic institutional customers in areas where T2S does not support their core requirements. The most notable areas are in providing asset servicing exper-tise and information across multiple CEE markets. Unicredit plans, on its current understanding of T2S, to offer customers three core options. It could offer a continu-ation of the status quo. It could offer a hub solution into the CEE via Unicredit’s existing Vienna hub. And, it could offer a solution for the asset servicing and other needs of customers that opt for a direct T2S inter-face (see box pp 54).

From an SEB perspective, Ulf Noren pro-poses a number of strategies that the bank could pursue in the face of these competi-tive dynamics. “We could elect to continue with our existing strategy, believing that the relatively strong business expansion that we have sustained in recent years will serve the bank well in a post-T2S world,” comments Noren. “But we recognise that T2S will substantially redesign the securi-ties services landscape in Europe – and our research suggests that a ‘continue as we are’ strategy is unlikely to be viable when T2S goes live. Customers may conclude that our unwillingness to adapt to a changing Europe is unlikely to serve them well in the future.”

With the launch of T2S to provide central-ised settlement for euro-denominated and some non-euro securities, SEB anticipates that leading global custodians and broker-dealers may seek remote access to the bank’s core markets, while still opting for the support of a local agent to support corporate actions processing, tax services, market information and other key asset

The ECB assures us that there will be no further delays and that the new planning is robust, although

the market seems to have its doubts about this. With these considerations in mind, it may be

unrealistic to assume that markets across the eurozone will be harmonised to a level where we will

pay 90 per cent lower fees for all cross-border settlements. In addition to bearing the estimated

!250 million cost of developing the T2S platform, market participants will bear the cost of ongoing

harmonisation initiatives at market level.

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servicing requirements. With this in mind, SEB will position itself to support the global custodian and broker-dealer community as they make these strategic choices – facili-tating direct access to the local infrastruc-ture and extending a complementary set of services that will dovetail with the service requirements that they meet internally (see box pp 56).

Strategic planningThe Framework Agreement for T2S has been delayed – owing, we are told by the ECB, to the success of the consultation process around the project design and gov-ernance framework. Given that it will be at least four years before T2S is implemented, FSR asked T2S stakeholders how this would affect their strategic planning for the inter-mediate period.

Unicredit’s John Gubert recognises that, for market participants, the extended T2S development period will have important implications for strategic planning and resource allocation. T2S will support mul-tiple instruments across multiple European locations, some of which share harmonised market practice at the time of the project launch; others will need to realign market procedures as they link to the platform. Thus, market participants will continue to bear signifi cant harmonisation costs within markets, in addition to the direct overheads associated with the T2S build and imple-mentation. Just as with Y2K implementa-tion, there is likely to be a period when fi rms with plans for direct links to T2S will be forced to place on hold work on all other development projects and to focus exclusively on T2S.

For users, the T2S project poses important questions regarding how best to link to the T2S platform. Some may elect to connect directly via direct connectivity arrangements. However, John Gubert questions whether the potential benefi ts will warrant the cost and complexity of establishing a direct technical link into T2S. For prestige reasons, some prominent players have indicated that they may connect directly as soon as the T2S platform goes live. However, others may prefer to wait until the project is bedded in and necessary refi nements have been made to the platform.

For Unicredit, the key is to support the bank’s global custodian and do-mestic institutional customers in areas where T2S does not support their core requirements. The most notable areas are in providing asset servicing expertise and information across mul-tiple CEE markets. Unicredit plans, on

its current understanding of T2S, to offer customers three core options.

“Firstly, we will offer the main-tenance of the status quo,” says Gubert. “Customers will have the option to continue their direct relationship with all our locations; we interface with T2S (most likely through the local CSD) and thus insulate them, to the extent pos-sible, from T2S changes. Secondly, we will offer our hub solution into the CEE, continuing with our existing Vienna hub. We are looking at the option of blending this with direct access to our different locations for asset servicing, market information and local infl uence, although we still have to gauge the appetite for such a service. And, fi nally, should cus-tomers opt for a direct T2S interface, we plan to seek out a solution for their asset servicing and other needs, although we are concerned at the risks engendered by such a model.”

For Unicredit, the key across the CEE is the complexity of the region’s relationship with T2S. It will be a hybrid region, with three Euro mar-kets (Austria, Slovenia and Slovakia), several Euro candidate markets, possible non Euro participants in T2S and non T2S markets. As a region, it will probably be in per-manent transition to T2S through to the end of the current decade whilst, at the same time, Unicredit anticipates material market change at exchange, CCP, CSD and in-strument levels. “Austria, as the gateway to Central and Eastern Europe and the home location of the Vienna Börse Group, will, in our mind, be the gateway to a complex and changing environment for the whole CEE,” comments Gubert. “We believe firmly that Unicredit is best placed, with its pan CEE market presence and expertise, to manage this complex transition. And, we are committed to do so.”

Getting connectedJohn Gubert, External Advisory, Unicredit Global Securities Services, explains to FSR how Unicredit GSS will be positioning itself to service customer needs in a T2S Europe

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However, Jan Lemeire indicates that Euroclear’s strategy is not dependent on the progress of T2S. In 2009, Euro-clear reassessed its project management strategy in order to accommodate T2S and to embrace other key initiatives that might impact its business planning. With this in mind, it has adopted a phased ap-proach to Single Platform Custody, Single Platform Collateral Management, Single Platform Transaction Management and to the Common Communications Interface in order to eliminate any duplicate invest-ments with T2S and to accommodate any potential movement in the T2S design or implementation timeframe.

More broadly, the global fi nancial crisis has prompted Euroclear to review the Single Platform project’s design and how best to

meet the changing needs of its customers. “Consequently, we have revised the launch sequence and broken down the remaining elements of the project into modules,” says Lemeire. “Single Platform Custody will be implemented fi rst and will continue to bring harmonisation to the asset servicing environment across all markets in which Euroclear is active. Thereafter, we will add a collateral management module, which Euroclear customers have indicated is crucial to the SP project in the current economic environment. It will enable them to access a wide pool of collateral across seven EU markets supported by six Euroclear CSDs and Euroclear Bank.”

KAS BANK’s Henk Brink believes that the one year delay already witnessed in the T2S project timeframe may result in additional costs for market participants, who may be forced to reorganise their project sched-ules and to reallocate resources that they

had expected to commit to other develop-ment projects running during 2010-2014. “The ECB assures us that there will be no further delays and that the new planning is robust, although the market seems to have its doubts about this,” says Brink. “With these considerations in mind, it may be unrealistic to assume that markets across the eurozone will be harmonised to a level where we will pay 90 per cent lower fees for all cross-border settlements. In addition to bearing the estimated !250 million cost of developing the T2S platform, market participants will bear the cost of ongoing harmonisation initiatives at market level.”

Clearstream’s Andreas Wolf notes that the T2S project timeline has already slipped by 15 months. Though the project implemen-tation was originally tabled for mid-2013,

this has now moved to late 2014. Though it has not been confi rmed publicly, some observers have suggested that CSDs may have only a nine month window in which to test and verify their interface with the T2S platform prior to supporting live settlement through this system. This will follow a 15-month internal testing period conducted by 4CB (the consortium of central banks of France, Germany, Italy and Spain who are building and will be operating T2S) and the Eurosystem project team in order to confi rm readiness of the platform. Commenting on this testing schedule, Wolf points out that this is a short timeframe when “open heart surgery” is being conducted on the securi-ties settlement system operating in leading European markets. And this presents sizeable risk to the smooth functioning of leading European securities markets, should technical diffi culties or a platform failure result within such a tight testing and imple-mentation window.

Though the Eurosystem has announced a price guarantee for the first two years of T2S’ operation,

we have pressed for this price guarantee to be extended to ensure that we do not carry volume

risk in the early stages of T2S operation. In the absence of this guarantee, CSDs may face a sharp

rise in the cost of outsourcing settlement to T2S if the platform fails to attract a critical volume of

settlement activity.

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With this backdrop in mind, Andreas Wolf reports that Clearstream continues to press for greater surety in the planning process. As this proceeds, Clearstream will continue to extend its range of global value-added services, including developments to its global securities fi nancing project and

investment fund services. “These strategies are complementary to the launch of T2S,” says Wolf. “We recognise a continuing need to diversify our services and to step well beyond core settlement, which is a service that, for a number of years, has become increasingly commoditised.”

With the launch of T2S to provide centralised settlement for euro-denominated (and some non-euro) securities, leading global custodians and broker-dealers may seek remote access to SEB’s core markets, while still opting for the support of a local agent to support corporate actions processing, tax services, market information and other key asset servicing requirements. With this in mind, SEB will position itself to sup-port the global custodian and broker-dealer community as they make these strategic choices – facilitating direct access to the local infrastruc-ture and extending a complementary set of services that will dovetail with the service requirements that they meet internally.

In reviewing its regional service of-fering, SEB anticipates that revenue generated from the 10 markets that the bank supports currently in Europe might not be enough to sustain profi tability in the future. From this 10 markets, only two (Germany and Finland) employ the euro as their offi -cial currency. “This will offer us some commercial advantage in supporting settlement in DKK, SEK, NOK, along with the Estonian kroon (EEK), the Latvian lat (LVL) and Lithuanian litas (LTL),” explains Noren. However, Estonia has confi rmed that it is ready for euro adoption on 1 Jan 2011. Alongside this, Lithuania is destined

to adopt a regime where trading and settlement will take place principally in euro. “With this development, we can expect the major European multi-market clearing and settlement providers to extend their coverage into these markets and we will see our existing comparative advantage somewhat diluted in these loca-tions,” he says.

In responding to these develop-ments, SEB will explore opportunities to establish strategic partnerships with other European securities services providers in order to sup-port client activity across multiple markets, as well as exploring oppor-tunities to use the infrastructure to connect into new markets wherever this makes sense. “Inevitably it is impractical to establish green fi eld service offerings across the 19 EEA markets that we do not support currently – and a partnership option with other eligible service providers is likely to be key to supporting clients’ cross-border service needs in a T2S Europe,” explains Noren.

A challenge that is relevant particu-larly to Nordic markets is how T2S will be designed to integrate ef-fectively with direct holding markets. The Eurosystem has been discussing the relative merits of layered and non-layered markets with leading market participants. However, at this

stage we cannot be sure what the end solution will look like.

Specifi cally, with the development of the T2S platform and Euroclear group’s 2008 purchase of the Nordic Central Securities Depository (NCSD), there is now some uncertainty re-garding which platform will be used to support securities settlement in the Finnish and Swedish markets. Euro-clear’s original plan was to deploy a variant of the Euroclear UK & Ireland platform for these two markets. However, it now appears unlikely that Euroclear group will commit signifi cant investment to platform redevelopment for these two markets when T2S will substantially redraw the settlement landscape when it goes live in 2014-5.

Commenting on these issues, Euroclear’s Jan Lemeire explains that some Nordic CSDs have stated publicly that they will continue to manage direct holding accounts on their existing platforms. Others are reviewing the alternatives available to them – including the option of out-sourcing settlement of euro and non-euro denominated securities transac-tions to the T2S platform. Euroclear Sweden and Euroclear Finland are currently engaged in an analysis, which includes validation with their clients, in order to arrive at the best possible solution that meets user needs in these respective markets.

Building strategic partnershipsUlf Noren, Global Head of Sub-Custody Client Relations, GTS Banks at SEB Merchant Banking, outlines how SEB may adapt its regional service offering in preparation for the launch of T2S

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KAS BANK’s Aletta Oostenbrug reports that fi rm dates have not yet been an-nounced for the T2S testing and imple-mentation, so we cannot be certain at this stage whether slippage in the project schedule may result in a shorter window for testing and migration. Preliminary signals

from the ECB suggest that CSDs will have an 8-9 month window in which to test their interface with the T2S platform prior to processing live settlement through the platform. “We estimate that this timeframe will be adequate, providing that the test environment can be set up promptly and testing procedures proceed smoothly,” says Oostenbrug. “However, this offers little slack should any problems be experienced during the testing phase. During imple-mentation of Euroclear’s ESES settlement platform, for example, connectivity testing started later than expected owing to some problems in the planning phase. As a result, this fed through into delays in functional testing, which could only begin when the connectivity testing phase was well advanced.”

Given the delays that have already been an-nounced in the T2S project timeframe, BNP Paribas’ Florence Fontan feels it imperative the Framework Agreement is not delayed further. T2S is a complex project, but she feels that a 2014 launch date is realistic providing that stakeholders work collec-tively to meet this target and we do not see any obstruction from parties that wish to protect their own strategic interests. T2S will follow a phased roll out according to a model similar to that adopted for TARGET2, with CSDs migrating to T2S in two main implementation windows and with a third window being available to handle any con-tingencies that might arise.

Moreover, direct connectivity represents one of the founding principles of T2S and it is vital that direct connectivity arrange-ments are mapped out clearly in the Framework Agreement. If this is not the case, Fontan believes that CSDs might delay their commitment to the Framework Agree-

ment on the grounds that they are not clear how direct connectivity arrangements will function. “When direct technical connec-tivity is enshrined in the Framework Agree-ment, CSDs will be obliged to support the right of CSD participants to connect to the T2S platform directly,” she says. “T2S will establish a competitive environment that will allow us, as users, to connect to the T2S platform via a range of CSDs. Should any CSD attempt to deny direct connectivity to its users, these users will have the option of connecting to the T2S platform via an alternative CSD.”

In closing, the ECB’s Jean-Michel Godeffroy reports that efforts to fi nalise details of the Framework Agreement will remain the most important task of the ECB and other T2S stakeholders during the remaining part of 2010. The T2S Programme Board continues to seek a balance between the need to se-cure consensus between interested parties and the need to preserve momentum in the project design and implementation process. In April 2010, the ECB Governing Council adopted the T2S Guideline, which provides the foundation for the legal framework for T2S. Through open consultation, the ECB is confi dent that it can deliver a T2S govern-ance structure and pricing framework that aligns with the expectations of core stakeholders and will be in keeping with its proposed timeline through which T2S will be ready to be used by the fi rst group of CSDs by September 2014.

This is a short timeframe when “open heart surgery” is being conducted on the securities settlement

system operating in leading European markets. And this presents sizeable risk to the smooth

functioning of leading European securities markets, should technical difficulties or a platform failure

result within such a tight testing and implementation window.