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Target2 Debate Heats Up
Critics of ECB's settlement plan see threat to local custodians, overstated cost savings
October 1, 2007
The debate over the future of Europe's clearing and settlement infrastructure continues to heat up following the publication of a recent white paper co-authored by ranking officials from Europe's two largest agent banks.
Much of the 61-page document--written by Diana Chan of Citigroup, Florence Fontan of BNP Paribas Securities Services and European Central Bank (ECB) executives--provides an overview of the securities services market, but its release last month ahead of the ECB's disclosure early next year of the further technical details for its Target2-Securities (T2S) project has drawn attention to the ramifications of the proposed system.
Over the past year, the ECB's proposed T2S platform has gained substantial political momentum with European leaders who are concerned that, eight years after the launch of the euro, processing cross-border transactions in Europe remains far more inefficient and costly than in the U.S. Each of the 13 eurozone countries has a central securities depository (CSD) that relies on proprietary operating systems and procedures, and financial intermediaries need to set up accounts at each CSD or pay agent banks hefty fees to access them.
The ECB envisions T2S as a "reverse integrated settlement model" where securities and cash positions in central bank monies exchange hands through a single centralized platform. ECB hopes that national European securities depositories will forward all of their settlement instructions to T2S while retaining legal ownership of accounts on their books and performing additional asset servicing functions. International depositories Clearstream in Luxembourg and Euroclear in Brussels, which settle in commercial bank monies, would not be affected by T2S. An estimated 650,000 transactions are settled in the eurozone daily.
While no one says they doubt the ECB's intentions, market players do question T2S's projected financial savings for national depositories and their members. The central bank 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 EUR85 million ($119.9 million) annually. Settlement of cross-border transactions in Europe can cost between EUR5 and EUR20, 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.
The next few months will be critical to the ECB's decisionmaking process: The central bank is soliciting industry input on the design of T2S from an advisory group of about 60 representatives from the eurozone's central banks and settlement houses. Of those, about 40 have voting rights, and the remainder--largely from trade associations--are observers. The advisory group oversees six technical committees focusing on T2S's scope, the process of matching counterparty instructions, settlement timetables, maintenance of securities reference data, and "non-functional" requirements.
Scope Unclear
Yet to be determined is which services T2S will include. So far, according to the ECB, T2S will not encompass custody, collateral management, corporate actions processing or securities lending. It also remains to be seen whether T2S will include non-euro-denominated securities and whether banks can have direct access to the ECB platform, thereby bypassing local depositories.
For custodian banks, the ECB proposal would heighten what is already stiff competition. "The T2S platform will affect custodian banks differently depending on the size of their book of business and the number of markets in which they are located," says Diana Chan, managing director for Citigroup Global Transaction Services.
