Liability in the event of a hiccup on new European securities settlement platform TARGET2-Securities (T2S) is back on the table, with central securities depositories (CSDs) concerned about where the responsibility will lie if something goes wrong.
There are at present 24 CSDs on board the European Central Bank’s (ECB) T2S project, set to launch in June 2015, having signed the Framework Agreement, a legal document governing the relationship between the ECB and each CSD.
James Cunningham, director of external and regulatory affairs at BNY Mellon, said although the agreement sets a liability regime, the topic was back on the agenda as a result of insurance concerns and the CSD Regulation, currently being considered by the European Commission.
“The ECB has spoken to various insurance companies to cover its liabilities under the framework, but it would be very expensive. I’m guessing its because there is very little precedent for this kind of insurance,” he said.
“This is an issue because the T2S project is meant to be self-financing. If there are a lot of insurance costs, these will be passed down to CSDs and to CSD participants one way or another.”
Cunningham said although the framework would be difficult to change, the ECB has signalled it was looking at the issue and would make a set of proposals on alternatives. The topic came up at the T2S Advisory Group meeting last month, he said.
“The ECB has put this topic on the table. We don’t know what the proposals will be, but they have warned us that something will come,” he said. “There are concerns that the liability regime will change and CSDs will become exposed.”
Legal contract
The T2S Framework agreement states the Eurosystem, the ECB and other Eurozone central banks, should be liable to a CSD for a claim of a customer in connection with T2S services, resulting from the Eurosystem’s gross or ordinary negligence in performing its duties under the Agreement, while no party should be responsible to another for a failure to perform any of its obligations because of conditions beyond its control.
Marc Bayle, principal adviser in the T2S project at the ECB, said the liability framework is part of the legal contract and would not change. The central bank is answering CSDs clarification requests on the matter.
“First of all we hope a major problem with the system will never happen, but we might only be held liable for what we are doing as defined in the contractual framework we have established with the CSDs,” he said.
“If there is something wrong, we have to look at which obligation has not been properly met and what type of compensation might be needed."
Bayle said the ECB is currently working on how to manage its liability exposure as defined in the framework. “This is an on-going process where so far we have only tendered for specialist/expert advice to help us in setting the framework for such liability coverage.”
Alexandre de Schaetzen, director, product management T2S at Euroclear, said a clear definition of liability for when the platform is up and running is needed.
“At this stage it’s still difficult to predict precisely how potential liability issues will pan out in practice. The challenge for the ECB is also to find an insurance policy at affordable prices, mainly because of the difficulty to assess the precise exposure.”