European settlement initiative TARGET2-Securities (T2S) will reshape the competitive landscape of central securities depositories (CSDs) through mergers, acquisitions and the rise of new entrants.
T2S, the European Central Bank (ECB) programme set to go live in 2015, will make settlement cheaper in the region, potentially driving down buy-side transaction costs. It will also see a new wave of industry partnerships that could further benefit the buy-side, the Sibos 2013 conference in Dubai heard.
“We’re going to see a consolidation on the one hand, and more CSDs popping up on the other,” said Nadine Chakar, executive vice president, global collateral services, BNY Mellon. “There is going to be a new breed of CSDs coming out from that.”
Speaking at the Sibos banking conference on Tuesday, Chakar, whose firm recently launched a Belgium-based CSD, said T2S was only one major change facing the industry.
In particular, the European Union’s CSD Regulation (CSDR), which forms the settlement aspect of post-crisis rules alongside regulatory regimes for clearing and trading, could pose major challenges to some CSDs.
“I do believe the local CSDs will have some challenges complying with CSDR and T2S at the same time,” Chakar added.
Fellow panellist Jean-Michel Godeffroy, director general and chairman of the T2S board at the ECB, agreed the number and variety of CSDs in the region would change with T2S, but said national CSDs would continue to play a vital role, potentially offering tailored services, or linking with larger players.
He said the technology was already in place for T2S and testing had begun, on track for the 2015 target.
“Of course we are discovering hiccups, hundreds of them, but these are minor. The big ones have been solved as soon as they are discovered,” he added.
New benefits
Godeffroy said the predicted cost savings T2S will drive, an anticipated drop from €3.00 to €0.15 per transaction, have led CSDs to reduce additional settlement costs. CSDs pay the ECB the €0.15 transaction fee and are entitled to pass on additional service costs to clients, but many have chosen not to.
“Under market pressure, [these costs are] converging towards zero and this is a big change,” he said. “This benefit has come earlier than expected.”
Clearstream is one CSD that has declared it will charge clients additional costs on top of the T2S fee, Mark Gem, member of the executive board for Clearstream International explained.
He said despite this, clients may face a marginal increase in asset safekeeping costs, but overall the benefits of T2S would be significant.
“You now have the opportunity to settle in one place, through a CSD or custodian, but most importantly, from one account,” he said.
As such, the effective outsourcing of settlement through T2S will give CSDs greater scope to focus on asset servicing.
Panellists agreed the initiative would create wider market benefits, including greater inflow of capital linked to lower settlement fees, although this would take time.
“It’s important to realise that cost reductions are not going to hit on the first day,” commented Chakar, adding individual firms would need to spend large sums at first to make the system efficient for their business.