T2S and CSDR Need a Securities Law Directive, Says Panel

The implementation of the incoming TARGET2 Securities (T2S) settlement platform and central securities depository regulation (CSDR) in Europe could face significant challenges due to the lack of a harmonized, pan-European securities law, according to panellists at the Clearing and Settlement World 2014 conference.

A number of initiatives, such as T2S and CSDR look to harmonize the settlement process for securities across Europe. However, implementation of these program could face roadblocks due the sovereign law of individual jurisdictions.

According to Angus Fletcher, director, head of market strategy and business advocacy at Deutsche Bank, the full benefits of CSDR and T2S will not be realized without the securities law directive. “That isn’t to say they aren’t workable without,” he says. Discussing the aspect as it relates to an issuer being permitted to issue out of any CSD in Europe under CSDR, Fletcher point out that it would be difficult for any issuing company to do so without a harmonized securities law.

Fletcher also highlighted that with the intention for several countries to bring in an issuance level transaction tax and a view that tax avoidance being the same as tax evasion, “there is not going to be much incentive to push for such harmonization, as countries will not want to see companies moving their issuance away from their original home state.”

“This is going to change the game quite a bit because it is going to create a strange playing field about regulatory arbitrage on the legal side which is linked to the CSDs,” says Guiseppe Insalaco, senior advisor, Central Bank of Ireland. “This makes everything very shaky.”

In addition, another issue raised on the panel was the consequences T2S would have on costs for market participants.

“The only worry I have is on the benefits for the buy-side; looking for lower costs is going to take far too long to kick in,” says Maurice Mulders, portfolio administration manager, PGGM Investments. “I think asset servicing in certain countries is going to increase rather than go down.

T2S is a program nine years in the making, with the first wave of implementation set for 2016. Because of this, and the vast amount that has been spent to develop this platform, Mulders argues it won’t be until three or four years after T2S is launched that asset managers and pension funds will feel the benefits of efficiency and cost-reduction.

In contrast, Insalaco argues, “As a regulator, the message from us is that we do not care about cost….. Yes it is going to be more expensive but it’s for a good reason.”