A seamless, cross-border financial market was meant to follow the economic unification of Europe and the introduction of its common currency. But while pan-European equity trading is growing ever easier through exchange mergers and electronic execution platforms, the posttrade processing infrastructure remains fragmented among a patchwork of national depositories. This mess has left Europe trailing the U.S. in both volume and cost of transactions: European Union studies have estimated that complete integration of disparate clearing and settlement systems could eliminate up to €5 billion ($7.2 billion) in annual excess costs and increase European gross domestic product by as much as 0.6 percent annually over ten years.
But entrenched clearing bureaucracies — and long-standing customs — have made change difficult despite entreaties from the likes of the European Commission–impaneled Giovannini Group, which in 2003 recommended the removal of specific barriers to cross-border clearing and settlement. The clearing organizations did sign on to European internal market and services commissioner Charlie McCreevy’s 2006 “code of conduct,” but that mainly called for fair competition and pricing transparency.
Now the European Central Bank is stepping in to try to impose real structural and economic reform to bring the crucial last stages of securities processing into line with the otherwise advancing single European market.
On December 18 the ECB published a bold blueprint that puts the bank at the center of what it defines as a “borderless and neutral securities settlement [platform] to crystallize the gains from harmonization and to provide support for competition between service providers in the securities industry.” Target2-Securities, or T2S, would be an outgrowth of the central bank’s Target2 real-time settlement system for payments, which is similar to the U.S. Federal Reserve System’s Fedwire. “We are a single market with a single currency,” notes Jean-Michel Godeffroy, the ECB’s director general of payment systems and market infrastructure. “Therefore we need, and we are able to deliver, a single platform for settlement.”
The December document is a major milestone for T2S, which the ECB began planning when the five-year Target2 implementation was completed in 2006. The bank had laid out general principles for T2S in a consultation paper last spring, but only now has it produced a detailed proposal for public comment, with a timetable for completion by 2013. Many capital markets participants have endorsed the plan and its anticipated economies at least in principle, but some depository organizations are concerned about losing the one third to one half of their revenues that they earn from settlement services. Their wariness threatens to boil over into full-blown opposition.
“Settlement systems across Europe are apprehensive,” says Paul Symons, head of public affairs at Brussels-based international central securities depository Euroclear, which, like its counterpart Clearstream in Luxembourg, hasn’t yet decided if it will join T2S. Settlement is “the key business of all of us,” he adds, noting that Euroclear itself is “trying to deliver” on the same vision as T2S by unifying its settlement and asset servicing platforms covering Belgium, France, Ireland, the Netherlands and the U.K.
Symons is one of 14 members of the European Central Securities Depositories Association, which, in a June letter to Godeffroy, warned that some of its members would argue that direct access to T2S be reserved only for depositories. That would presumably preserve their roles as intermediaries. Godeffroy says he understands that “the depositories are more hesitant because it will be hard for them to justify high profit margins on something that is done by T2S.” The ECB plan does not envision taking depositories out of the settlement process, but its main objective is to achieve economies of scale, says Godeffroy. The published proposal pointedly suggests that depositories “consider investing in asset servicing, [which] may imply a significant adaptation of their current business model.”
Among the most vocal supporters of T2S are custodian banks that have long complained about the duplicative costs of Europe’s fragmented securities infrastructure. Simon Copsey, vice president of direct clearing and custody for Citibank in London, points out that under T2S, Citi and its multinational peers would have to post collateral just once, rather than with the many depositories. “For us and our clients, if T2S delivers the harmonization and efficiency benefits it is supposed to, there is no downside,” he says.
