Amid the justifiable euphoria around the signing of the T2S framework agreement by almost all the eurozone CSDs and several non-Eurozone ones, it is worth contemplating what the next steps will entail both at CSD and custodian/clearer levels.
At the CSD level, there are, in reality, three groups of participants. There will be the full-service CSDs who will offer T2S gateways for their home market and onto those of all other participants. There will be local market members whose service offering will be limited to their domestic market. They will not build T2S links to all others as the cost does not justify the expense, for they experience low flows across these markets. And there will be the non-eurozone members, who will offer facilities to settle in the euro but whose volumes in that currency (other perhaps than in the case of SIS Intersettle) are modest to non-existent.
At the potential participant level, there also appear to be three core camps. An ever larger camp appears to have decided that there is no benefit in being first mover in this initiative. This impression is heightened by concerns that there will be a Phase 4 for CSD migrations or a delay in the delivery timetable as the project accepts demanded changes from different CSDs. The second camp is preparing their European network to give themselves flexibility at a later stage should they then decide to participate directly in T2S. And a third group will look for some direct participation on day one, but the likelihood is that this will often be for a Phase 3 market rather than any of the earlier adopters.
The concerns of users are multiple. First, there is doubt about eventual cost savings. There is a growing realization that settlement fees will decline but other fees will move to compensate for this, and it appears unlikely that such movement will be just at agent level. It could also be at different CSDs with fixed account maintenance charges being a case in point. And the investment banking community, in particular, questions if the cost and reliability of their liquidity demands are not best met by using an intermediary for the entire transaction process, especially as the liquidity policies of the different NCBs has still to be finalized. The direct model, using third-party asset servicers, has also been reviewed in greater detail, and many are concerned that, unless there is far greater standardization of the entire gamut of corporate actions, the risks of this model are meaningful.
And there is also unhappiness at the funding structures being contemplated by some CSDs. Prefunding of the development through pre-T2S transaction levies has not been ruled out. As some feel that many CSDs are re-engineering their entire platforms and calling that their T2S development, the concern is not far from anger and mutterings of references to competition authorities. The cost of T2S is still linked in peoples minds to the 15-cent transaction charge proudly evoked by the ECB, but now it is realized that associated communication costs and other charges will at least double that figure. And that assumes the ECB will be happy to extend the amortization of their fast-accruing, higher-than-planned development costs well into the future to compensate for the delta between their estimated and actual market volumes.
T2S remains a value in that it allows migration of euro settlement to a robust central bank money platform, and it can be a catalyst for further market harmonization. Hopefully, longer term it will be the driver for a pan-European CSD: in reality, the only model that makes total sense to at least the pan-European (as distinct from domestic) user community. But signing the framework agreement is just the start of the hard part, when CSDs have to find the funds for their development needs and the expertise to allow successful completion of the complex process of T2S adhesion and then business re-engineering.
One suspects that it will be a rocky road. The years ahead for many users will be more about choosing partners able to manage the process for them rather than seeking to be pioneers themselves.