TARGET2-Securities (T2S) – the single securities settlement platform launched successfully in 2015 – is slowly but surely changing the competitive landscape of the securities industry in Europe.
When the migration process to the new platform is completed in 2017, CSDs from 21 European countries will have joined, along with their communities. At this stage in the process, approximately 45% of European volumes have migrated. The platform has more than 100 users and is proving, for the most part, to serve its purpose.
Even if the well-promoted advantages of reduced settlement costs and easier access to cross-border securities have yet to fully materialise, migrated entities are now able to use a single liquidity pool for all settlement activities across different markets. They are also enjoying advanced settlement functionalities and the auto-collateralisation of services, which has resulted in substantial liquidity savings.
The lengthy process of European harmonisation has benefited from substantial progress thanks to T2S, even if there is still a long way to go in order to achieve the objective. By creating a pan-European processing platform, T2S is facilitating fierce competition between CSDs and custodians and is forcing both to review their business models and their strategies.
Some CSDs are adopting the investor CSD model, thereby extending their geographical scope. Others are expanding their services into areas previously controlled by custodians, such as asset servicing. Meanwhile, ICSDs are developing further their collateral management offering boosted by regulatory obligations.
At the same time, larger international players are using this market change to renegotiate their fee structures with custodians and CSDs. This is likely to result in reduced costs for the industry in the longer term, primarily due to tightened margins.
Custodians and CSDs are looking at asset servicing as a key differentiating factor, now that settlement has become a commodity. They are therefore working to improve their asset services or to get these from the best providers on the various local markets.
All this leads to a segmentation of the various functions (settlement, asset servicing, collateral management) that start to be serviced by different providers, thereby creating new business models. To respond to this, custodians are developing new offerings such as asset service-only or account operator services.
The emergence of these new models means that competitors are starting to cooperate with each other. CSDs are buying services from other CSDs or custodians to be able to offer a complete set of quality services to their community.
At the moment, some global custodians and brokers that were previously holding back to wait and see how the market would react to T2S, are looking at what they can do to take maximum benefit from this new landscape. The entire market is re-positioning itself and the life-cycle of a transaction is becoming increasingly fragmented. Clients are now less reliant on just one provider and multiple players can now be servicing a single client for a single market. Securities services are no longer a “one-stop-shop”. This new trends creates increased opportunities for CSDs and custodians alike in meeting evolving customer needs.
We should see the benefits of T2S accelerate over time, but the speed of that impact depends on the ability of the CSDs and major market players to realize the benefits of T2S. Although this message is slightly at odds with the widespread belief that T2S will, by reducing the settlement revenues of European CSDs, result in a far-reaching consolidation of market infrastructures, it is not contradicted by it. Even though we have yet to see any significant consolidation – save for the likely London Stock Exchange and Deutsche Borse merger – we can expect more in the future.
T2S helps create an increasingly harmonised and competitive playing field and will continue to have an impact, but it still remains part of a long process of integration. T2S alone cannot deliver a level playing field, but significant elements of fiscal harmonisation, securities law, etc. have yet to be addressed. Until they are, we will not see much notable change in the European securities market, nor the creation of a real single capital market in Europe.