As T2S moves from being a project to a reality, it is appropriate to think beyond the four waves and for the markets to plan for the future.
T2S itself is an overpriced mechanism for centralizing pan-Euro denominated settlement. It is overpriced because a simple concept, namely a single settlement engine, was created within the EU political framework. It operates in too democratic an environment for a project, with a resultant bureaucracy and tolerance of national idiosyncrasies that has led to excess expenditure and late delivery. If ever a project grew a white beard, this is it! Amazing as it seems, many in the team around T2S were really youthful when it all started a decade or so ago.
All is, though, not lost. T2S could become the catalyst that transforms EU securities settlement and more. This will happen if T2S becomes truly multi-currency, acts as a catalyst for real harmonization, and extends its reach into income and corporate actions as well as captures further major transactions flows outside of the current orbit of its CSD population.
T2S and the ECB really need to revisit their approach to non-Euro currencies. There is a real appetite from countries, such as those in the CEE region, to join the platform and it would make them much more accessible as markets. I suspect that two policy issues need to be reviewed for this to happen. First, we need to consider if the indigenous non –Euro denominated RTGS platforms really need to be moved to the ECB environment or whether their National Central Banks could be allowed to create, within their own platforms, local currency T2S accounts over which the ECB would have an operating mandate. Such a structure would mirror the proven CREST structure in the UK. Second, we need to ensure that local markets have adequate liquidity to ensure the smooth running of such accounts and that agreement can be reached on the structure of both cash and stock finality. It is even possible that such a structure would overcome the resistance of the U.K. market and allow another major and high volume transaction flow to be added to the T2S environment.
T2S needs to have a specialized harmonization section and its remit should be across the entire post trade platform. There are substantial flaws in the post-trade and issuance market segments, and they overshadow efficiencies inherent in the unified settlement platform. T2S need not be the vehicle for some of the harmonized changes but it should be the catalyst, especially as several are regulatory and governmental in nature. Critical issues for harmonization include stamp duties, withholding tax reclamation, CSD account structures, a pan-EU standard single submission KYC process, registration practices, MiFID/trade reporting data harmonization and adoption of LEIs to name just a few!
Straddling the settlement and harmonization world is also the creation of income and corporate action information repositories. These need uniform standards. We require an obligation for issuers to complete a data template at the time of issuance. This should not be left to agents or infrastructure that then have often to go through lengthy documentation, speedily and with unnecessary time constraints, in search of basic information needed for the primary, and subsequent secondary, issuances.
Another key target would be international securities, namely the bonds held in ICSDs.
This is a real challenge for two reasons. The first challenge to overcome would be a move from low cost commercial bank money to central bank money. And the second challenge would be the collateralization process. They are linked and the critical issue will be the willingness, or otherwise, of the ECB to apply the more liberal collateral structures adopted by the ICSDs. If the ECB is willing to extend its collateral eligibility programme, then we have to establish how assets held in the ICSDs can be used in T2S. At a transaction level this is simple for the auto-collateralization process is easily transportable to a wider range of instruments. But international securities settlement also uses stock held in the ICSDs to provide coverage, for instance, for Global Custodian flows where the Global Custodian cannot use the securities in settlement as collateral and for the added haircuts that are applied to non-government issues in settlement. This is a legal, rather than fundamental, issue as the arrangements used to protect the ICSDs could easily be transferred to another party and thus gives them added cover. However, a careful assessment would also be needed of the dynamics of international securities settlement as the intraday friction across the settlement batches as well as across the ICSD bridges can create material liquidity gaps. As the ICSDs have proved across the bridge, increasing the number of batches would alleviate this problem.
Many of these ideas will be unpopular, but the reality is that the current EU landscape is dysfunctional with too many CSDs, too many trade repositories, too many CCPs, too many agents as well as too many processes. I have focused on the latter but, over the coming months, I will examine options to reduce the pernicious and duplicative impact of overpopulation across our entire landscape.