GC Friday Interview: Thomas Zeeb, CEO of SIX Securities Services on T2S

The new regulatory environment is front of mind for nearly all in the financial services industry, and Thomas Zeeb, CEO of SIX Securities Services, is no exception. Here, Zeeb shares his views on how these changes are affecting the industry, including how TARGET2-Securities (T2S) misses the mark.

GC: Is there any sense that now that regulations are actually coming into effect, they’re better than you might have thought?

TZ: It’s worse, much worse. Not because the regulation itself is worse than was expected, but it becomes increasingly clear that there are inconsistencies between different jurisdictions and the implementation of those rules; it’s already becoming apparent that there will be multiple cycles of fixing unintended consequences, simply because so much was pushed through quickly and nobody bothered to do the real analysis on what is a fairly delicately balanced system of interrelationships which has grown over time. We expect that we will have to deal with multiple revisions and changes for at least the next three to five years. And that’s not something most of us are looking forward to.

GC: What regulation in particular has the most inconsistencies, and what’s taking up most of your time?

TZ: Take your pick. I can’t give you one piece because if you look at the CPSS-IOSCO standards, Basel III, CSDR, National Bank Ordinances, EMIR (European Market Infrastructure Regulation)—you look at all of those and start picking out what’s common, and what’s common in concept but not in implementation. I defy anyone to show me an overview that actually shows all of that, or for someone to say there’s a master plan behind this. It’s chaotic, and the entire financial industry is struggling with ensuring that we comply with these different rules and regulations.

GC: What are the best ways to work through these implementations over the next few years? Do you just have to swallow the cost, or is there anything you can do to make it a little easier?

TZ: There’s a certain amount of this that we brought on ourselves, and there certainly are legitimate elements that need to be addressed, but we’ve got significant issues where regulators in different countries or different regions aren’t talking to each other, or are favoring a political interpretation rather than an objective one that addresses the issue. So unfortunately there’s no simple answer to the question. You can’t point at specific bits or specific regulators. There’s a full-blown industrial revolution type industry built up around creating legislation. Somewhere in the middle there you still have to look at the client and try to do what’s right for the client. I’m not convinced that all of these new rules will actually generate a clearer, and therefore safer and more predictable environment within which financial institutions can carry out their business. It most certainly will not be a more efficient and cost effective environment.

GC: How is T2S affecting you? Is that something you see as not having a beneficial result in the end?

TZ: T2S is not strictly speaking a regulatory issue; it’s an operational initiative designed to enhance integration more than anything else. Does it address the true issues, risks and costs in the European markets? Not even close. The real issues there are on the asset servicing side, and that is a much more complex issue which includes the need to harmonize tax rules, harmonize pension rules, agree on standards that go beyond Giovannini, etc. That’s where the real costs and the real risks are. That’s also, not surprisingly, where we apply most of our resources. Most Western European markets with the exception of the U.K. have a settlement efficiency rate of well over 99%. I understand the political desire for an integrative project for Europe. At the same time, however, at an operational level, there is little rationale for creating a billion-euro project, along with an extra layer of service delivery, in the quest for efficiency and cost-effectiveness. I do not believe for a second that we will see, on an end-to-end fully-costed basis, a reduction in costs as a result of T2S. Settlement costs may go down, other costs will go up to compensate, because somebody’s got to pay for the hundreds of millions of euros being spent by banks and infrastructure in the eurozone and outside to hook up to T2S, in addition to the ECB’s own project- and running costs. I don’t think it addresses a core issue. The core issue is lack of harmonization across markets, and that’s a much, much more difficult thing to achieve, and requires a real political will to implement.

GC: How could that harmonization be achieved more effectively?

TZ: In the current EU structure, I don’t see the political will required to implement real change for the better. Who’s going to tell the U.K. to get rid of their stamp duty and to tax on a different basis and to sort out their pension schemes differently, and do the same in Italy, Germany, and France? There’s not a single politician as far as I can tell, who is prepared to follow this kind of agenda, because it goes to the core of what national policies are all about, and the EU has not made that next step. So you’ve got this pseudo-integration exercise with T2S, which operationally will bring some marginal benefits around central bank money settlement, but at a very, very significant cost to the industry, and ultimately the end-client.

T2S is a given; it will be implemented. SIX is going in in Wave 1. Our project is well on track with no issues there. But is it a quantum leap in efficiency as a result of our participation? Not a chance. Over time it will create some more consolidation in the market, and over time it will probably pool assets in fewer institutions. All of that is true, and all of that will ultimately create some additional efficiencies in, for instance, collateral usage and optimization, but there are also other ways to achieve that.

GC: And those efficiencies don’t outweigh the downsides for you?

TZ: It remains to be seen. At the moment I don’t see it. We deal with T2S because there is a clear political commitment to implementing it in the Eurozone, and much of our business and our clients are there. But at the core, T2S is nothing other than a re-nationalization of the activities that were sold by the various countries in the past—privatized, sold into listed companies or user-owned, user-governed companies. And now it’s being taken out again by force of legislation, with no choice being given to infrastructures in the Eurozone countries. I can understand the value of the integration and symbolism. For the EU, that may be an overriding principle that makes more sense, but I don’t think we should delude ourselves with some kind of silly business case and analysis that says it’s going to make settlement of transactions in Europe more efficient or cost-effective.