Sibos hosted its first TARGET2-Securities panel discussion today, amidst a host of questions about how the settlement infrastructure would change the European securities services landscape.
Paul Bodart, member of the T2S Board at the European Central Bank and panel chair, asked CSD representatives how much reshaping of the business model would be required under T2S.
Mark Gem, member of the Executive Board, Clearstream Banking Luxembourg, said: T2S cannot deliver a single market for settlements one needs to consider asset servicing, interoperability with markets that dont connect to T2S and the collateral management implications. If they want to realize the promise of T2S, the banks and the Eurosystem will have to reshape their models. Ultimately customers and intermediaries need to reshape the way they buy services today. Everyone from custodians to broker-dealers and savings banks will have to change the way they buy the services.
The supply chain also has to be looked at. Nobody has a full deck of products, services and components. Hence we need to work with asset-servicing partners and create partnerships such as the one we created with BNP Paribas on collateral management.
We also wont prevent DCPs [direct connected participants] from using our infrastructure. Well have full custody services across all markets. We wont do it alone, but well do it with those providers on the ground, which have the expertise. Well work with people who have core competencies in other markets that we can leverage. Our collateral management will benefit from pooled liquidity that T2S presents.
Alain Pochet, head of Clearing, Custody & Corporate Trust Services, BNP Paribas, agreed that the new infrastructure will result in a secure market for settlements. To reduce costs and get efficiencies, we need all volumes in one system. There is a lot of difficulty as settlement is done on one platform and asset servicing on another platform. There is the flow business for the sub-custodian under T2S. The system has to be used for everybody so that people dont use their added value but rather shared value created by the ECB. Its our role, using the appropriate governance, to tell national CSDs that they have to tackle inefficiencies and to invest. They have to be put in front of the important savings we have to develop. They cannot just duplicate another system.
Commenting on whether T2S will stir competition in the settlement landscape by acting as one platform and a single CSD, Jesus Benito, CEO, Iberclear, said: Yes, we believe in the model of competition based on the links we will have to make with T2S and other CSDs. There are already many banks and custodians. I dont see any value in reconstructing businesses and being a custodian. As long as CSDs can offer cost benefits there will be a room for them. Banks are worried about CSDs moving up the value chain this is unfair as the regulator wants us to provide links, and to do this we have to offer asset services for securities in other markets. Id be more worried about banks moving into the CSD space rather than moving down the value chain.
Diana Dijmarescu, managing director, J.P. Morgan, called on them to provide a better understanding of their competitive offers and models on the table. Weve already had to think about changing our buying patterns and we have the potential to change the model either by using a CSD as one point of entry to T2S of various other permutations. It has to happen in parallel with what the CSDs are doing. Were running out of time but were missing elements from CSDs on their offerings and pricing structures.
Bodart asked panelists for their views on whether settlement harmonization would eventually be reached through T2S. Dijmarescu said: Were optimistic but settlement harmonization is not enough we need to look at asset servicing in a T2S framework only a limited amount of harmonization can be delivered. Were waiting for proposals that deal with settlement inefficiency, but in the meantime we need to push through to get the benefits.
The panel concluded with views from each speaker on the biggest challenge facing market participants in T2S in the next 12 months and when the landscape becomes a reality in 2015. Pochet said: We need to speed up process by adopting ISO 20022 for corporate actions. Were all committed to having the project delivered. We need to forget about the political aspects; instead we need a simple, efficient and safe way to migrate business from the existing platform to a new platform in a safe way.
Gem agreed: Weve got to get the project done. We need to have an adequate methodology to ensure the links are there and ready for use to start using the system. People also have to change buying power and have the guts to invest in the network management. There is a temptation for market participants to stay as they are, while the rest of us are spending $1 billion or so on this project. This will be a challenge.
Dijmarescu said: Another challenge is the regulatory framework. We need principles for CSD recovery and resolution. These will be critically important as we approach T2S.
– Janet Du Chenne