The latest meeting of the T2S advisory group in Frankfurt earlier this month concluded with the promise of a draft User Requirements Document by the end of this month. A final version will be issued for public comment either next month or in early 2008.
Provided comments received on that document during a proposed three month consultation period are encouraging, the governing council of the European Central Bank (ECB) will give the go-ahead to the project. The target start date remains 2013.
The ECB divulged at the Frankfurt meeting that all 67 (sic) proposals for the system, some of them controversial, had now been agreed upon – and by consensus rather than vote. Which suggests that the ECB believes voting would make differences of view too obvious for comfort.
The governance of T2S, however, remains an undeniably tricky issue. CSDs wish to ensure their own survival by restricting the functionality of T2S. Since CSDs – and national central banks – would have to outsource settlement to T2S from the outset, and so run the risk of eventually being supplanted by it, they want to exercise at least some level of control.
The sub-custodians, on the other hand, which have welcomed T2S as deliverance from Greater Euroclear, feel equally strongly that as the main users of T2S they should dominate its policymaking. That way they can prevent it expanding, DTCC-style, into their own areas of business.
Some form of user governance is inevitable, but which group of users – CSDs or agent banks – will predominate is as yet unclear. The TARGET II payments system, DTCC and SWIFT are all possible models of user ownership and governance, but there is also a view that governance can evolve as the project develops.
Certainly getting the project built will be tougher if democracy is adopted too early. Somebody at the Frankfurt meeting even raised the idea of making the ‘public interest’ – whatever that might be – the prime consideration.
Nothing illustrates the underlying tensions better than the different views over whether T2S should offer direct connectivity (rather than connectivity via local CSDs) and whether it should offer a trade matching service.
Some bankers argue that matching must be a key component of T2S, but that T2S must, in addition, have the ability to process transactions which are already matched elsewhere.
CSDs say that, because T2S would have no direct legal or business contact with users, directly connected users would have to preserve two connections: to both the CSDs and to T2S. Indirectly connected users, on the other hand, would need to maintain their connection to a CSD only.
At present, the discussion on points such as these is being conducted by proxy – will it save money or be more efficient than present arrangements? – but the real agendas of those on both sides of this argument will emerge eventually.
One of the benefits adduced for T2S is the creation of a single pool of collateral. Whether this is of greater benefit to the ECB, or the banking industry, is unclear – not least because the banks do not appear to have thought about this issue yet.