Greater cooperation between jurisdictions, clearer standards and more efficient ways to manage collateral are the keys to improving Europes market infrastructure, according to a panel of central bank and securities services providers.
Introducing the Wednesday morning discussion on what European infrastructure might look like by 2020, Benot Cur, member of the executive board of the European Central Bank (ECB), said the union was committed to being a single market and it was important to look forward, beyond the financial crisis in which Europe presently finds itself.
Coen Voormeulen, division director, De Nederlandsche Bank, said Europe presently had a heavily tiered system between direct and indirect participants when it came to collateral management.
When institutions are not able to be direct participants, then issues arise, said Voormeulen, explaining that for payment systems to operate in a safe environment, participants need to be able to access real time gross settlement (RTGS) systems as direct participants with proper oversight and protection.
By 2020, European market infrastructure would have more ancillary systems to settle RTGS based on central bank money, predicted Jochen Metzger, head of the payments and settlement department at Deutsche Bundesbank.
Regulatory and market changes could result in a shortage of quality collateral, warned Florence Fontan, head of public affairs, BNP Paribas Securities Services. In this scenario, collateral management would be a key requirement by 2020.
Investment managers will have to better manage their exposure and reduce the need for collateral as well as allocate the right collateral to the right requirements, said Fontan.
Offering a viewpoint from the ICSDs, Jol Mrre, executive director of Euroclear France said it was certain that by 2020, there would still be competition between central and commercial banks and Mark Gem, member of the executive board at Clearstream Banking, said it was important that the hard links between the triparty agent and the assets were broken.
Money should be able to be held using one account globally, said Gem.
T2S on track
Central to the future of market infrastructure in the single market is TARGET2-Securities (T2S).
According to Marc Bayle, T2S programme manager at the ECB, the central bank is making great strides in delivering T2S.
The project is going well. We are nearing completion of the development stage. At the end of September we were 87% complete and by the end of the year we are on track to realise 100% completion, said Bayle. We are now focussed on testing the software and hardware, with a view to going live in 2015 in euro. T2S is a multicurrency system and kroner will be added by 2018.
Launched by the Eurosystem, T2S will provide a single harmonised venue where almost all traded securities circulating in Europe can be settled against euro and potentially other European currencies with standardised communication protocols and harmonised market practices.
Today, settling securities transactions in Europe is fragmented along national borders and costly in cross-border situations, observed Bayle. Under T2S, it will make no difference in technical, risk and cost terms if end-investors and the securities traded are in the same country or not. A single set of rules, standards and tariffs will be applied to all transactions, reducing the complexity of todays market infrastructure.
Recent advances include the signing of the T2S framework agreement endorsed by the ECBs governing council in November last year which set up a new governance structure that embraced 23 European central securities depositories (CSDs).
The framework agreement sets out the contractual rights and obligations of the Eurosystem and each contracting CSD, and covers the development and operation of T2S, said Bayle. It regulates the scope of the controlling powers of the CSDs relating to the outsourcing of their settlement function to the Eurosystem, as well as issues like liability, protection of intellectual property rights and confidentiality.
The ECB team is now also finalising the detailed migration strategy and within a few weeks parties will know who will migrate when.
We are presently stabilising the user testing plan. This is a big challenge because we are migrating full communities, not just technical systems, said Bayle. These moves will be done in groups of countries divided by industry sectors.
Bayle said one of the many benefits of redesigning a system completely is that you are able to take on the latest generation of standards in one go, and T2S will adopt ISO 20022 a standard that spans financial services to provide greater information reciprocity between all sectors of the industry.
-Printed in Sibos Issues