Its a good job that implementation of the Target 2 Securities (T2S) initiative – an attempt to create a single European platform for cross border and domestic securities settlement – isnt due until 2013. There are many hurdles to overcome, the most recent of which is the UKs reticence to be involved in the initiative.
T2S will be operated by the ECB as the central bank of the eurozone. As the UK is outside the eurozone, the Bank of England recently expressed concerns that it was unhappy about the prospect of losing control of the sterling payments system to an organisation in which it has no governance. The impact of this decision will be widely felt.
The UK is one of Europes largest markets and its non participation in T2S would therefore blow a hole in the T2S claim to be pan-European. Its absence from the initiative would undoubtedly introduce more complexity for CSDs and CCPs that operate both in and out of the eurozone, such as Euroclear and LCH.Clearnet. For example, Euroclear will need to finish its single platform project for the non T2S countries while also participating in T2S. Also, operational complexity could be worsened, if, as rumoured, the T2S system will operate on a T+2 settlement cycle and other markets remain on a T+3 settlement cycle.
Moreover, by throwing this proverbial spanner in the T2S works, it will further enforce the reputation of the UK as being Less Europe inclined, therefore making negotiating/lobbying in Brussels around the future supervisory structure of Europe more difficult.
Some industry observers have claimed that the BoE position is being laid down as a negotiating tactic, while others believe that the objections are fundamental and are therefore unlikely to be resolved. Regardless of your view on motivation, the effect of such clear objections cannot be underestimated. Without the participation of the UK, T2S could seriously increase fragmentation and cost, rather then reducing both.