As TARGET2-Securities (T2S) faces a potential launch delay, a panel of experts believe the platform depends on the omnibus account structure for its survival, despite regulation encouraging segregated account models.
The harmonized settlement platform for Eurozone securities, planned for launch on June 22, still has some technical issues to be resolved, Paul Bodart, project director said. The T2S board of the European Central Bank, the platform’s owner, will meet on May 25 to decide if the launch will go ahead.
The new platform is predicated on a system of links between central securities depositories (CSDs) based on omnibus account structures. However, panelists at the AFME European Post-Trade Conference, including custodians and market infrastructure participants, said that given the links planned in T2S, regulators have to be clearer on the levels of client asset segregation. “The regulators should be careful to use segregation at the risk of making more less efficient links between CSD in T2S,” says Yvon Lucas, advisor to the Director General Operations, Banque de France, and T2S board member, European Central Bank.
According to Lucas, there is a pressing need for harmonizing rules on segregation to overcome these potential inefficiencies between CSDs, and will be useful to enable cross-border flows of securities transactions.
Furthermore Angus Fletcher, head of market advocacy for Deutsche Bank Global Transaction Banking, said further clarity is needed, not just on segregation but on who is allowed to hold assets. “For instance, will it be covered by the securities law directive? We have to get away from the view of simply saying segregation is the way forward to ensure safety, I think we need a proper discussion around segregation and what is the problem the regulators are trying to solve.
“One subject to discuss is the how to get assets back as soon as possible. Issuers want to understand who the shareholders are as intermediaries. I don’t believe segregation is the sole answer to that. But what is the answer? What level of segregation is best and what is the best way to drive it if your assets are comingled with others?”
One way to overcome this is to allow the end investor to choose the level of segregation they want for their assets, especially when it comes to collateral management Clearstream’s Guido Wille, head of Market Development, said.
“There is client demand for segregation amongst investors because of their own assessments of risk at certain levels. The greater need for collateral management is driving segregation because if your assets are comingled with other investors, collateral management is vastly less efficient. The question in my mind is can we leave this to the investor to determine the right level of segregation and safety they want for their assets,” says Wille.
Another issue panelists discussed around T2S was how the technology is going to evolve. “For example, does the settlement discipline for securities end with T2S or is it best to look further at a public private partnership whereby the CSDs would provide the technology since the central bank is unable to do so?,” Fletcher asked.
Segregated Account Structures Threaten T2S, Panelists Argue
As TARGET2-Securities (T2S) faces a potential launch delay, a panel of experts believe the platform depends on the omnibus account structure for its survival, despite regulation encouraging segregated account models.