The European Central Bank’s Target2-Securities initiative can deliver increased competition and price transparency. But there is still some way to go in this debate.

The European Central Bank’s (ECB’s) Target2- Securities (T2S) initiative promises to open up competition in the settling of securities trades conducted in euros, a prospect that not all of the EU’s central securities depositories (CSDs) relish.

But eight years after the introduction of the euro, and with the Markets in Financial Instruments Directive (MiFID), which seeks to harmonize Europe’s trading environment, up and running, Europe lacks a harmonized post-trade infrastructure.

Thomas Kroon, Vice President OMX, says the introduction of MiFID has put pressure on the post-trade environment. “Clearing and settlement is becoming a hot topic,” he says. “T2S raises the question of whether a CSD should be a utility, how much of a utility a CSD should be and whether we should follow the US model of a single, centralized infrastructure.”

T2S is based on Target2, a real-time gross settlement system for the euro that settles EUR 1.9 trillion daily. T2S will be a platform for the cross-border and domestic settlement of securities against central bank money. The platform will service Europe’s CSDs and will be developed and operated by four national central banks – Deutsche Bundesbank, Banco de Espana, Banque de France and Banca d’Italia. T2S will deliver increased competition and price transparency, according to the ECB, which will drive down costs.

Anders Reveman, an adviser to the European Central Bank, explains that CSDs that are “proactive and start to adapt to T2S early – and possibly also participate in the development process” will benefit the most from T2S.

Paul Symons, Head of Public Affairs at Euroclear, says the international CSD is “broadly neutral on the subject of T2S; we are neither for it nor against it, because at the moment there is not enough information to judge whether it will be good for the European clearing and settlement business or not.”

He suggests there is still a question as to who will own and operate T2S. Will it be the national central banks that are supporting the development or will there be a new legal entity created? “This is an important question because if settlement systems are to outsource to T2S, they need to know with whom they are contracting.”

The consolidation of settlement systems on its own won’t reduce costs, says Symons. “The real costs in Europe are in the divergent legal and fiscal regimes, which make cross-border custody operations so complex. Unless the ECB addresses harmonization across Europe, we think the benefits of T2S could be difficult to prove. But such harmonization is costly and takes a lot of resources and time – we know this from our experience in the five Euroclear markets, and the ECB is looking at the whole euro zone.”

There is still some way to go in the T2S debate. By the end of March 2008 public consultation on the draft user requirements document (a hefty tome of more than 700 pages) will be finished. By June or July 2008, the ECB Governing Council will decide whether or not to go ahead with the T2S build. If all goes as planned, T2S is scheduled to go live in 2013.

By Heather McKenzie  Illustration Måns Adolfsson

MarketView 2008:1