Europe's new settlement engine is less than a year from launch, and while many problems have been solved during its long development, the final stretch to implementation still has many challenges, according to some of the project's architects.
In 2003, the Gionvannini Group – advisers to the European Commission –identified 15 barriers to a harmonised cross-border clearing and settlement landscape in Europe, and a roadmap to eliminate them. Now, 11 years later, the chairman of that group, Dr. Alberto Giovannini, CEO of Unifortune SGR, and a panel of market participants took the stage at Sibos, with less than 12 months left until the launch of the European Central Bank’s (ECB) single securities settlement engine, TARGET2-Securities (T2S).
“One of the problems that T2S is addressing is the status quo of the European markets,” Giovannini said. “The European markets were characterised by financial infrastructures that were all country specific. As such, it made access from outside of those countries a very costly and a very complicated affair.
“T2S, for the first time, accomplishes what we have been trying to accomplish for more than 10 years with the European Commission,” he continued. “I must say that it is quite striking to see how some of the problems that were regarded as really difficult when we started these discussions have been solved as a result of T2S.”
For example, he said, the proposed erosion of established boundaries between services offered by custodian banks versus central securities depositories (CSDs) engaged participants in a bitter debate as did ‘Barrier 6’, concerned with national differences in settlement periods. “At the dawn of the new era, many of these issues are behind us,” he said. “It is still important to ask ourselves what the remaining problems are.”
The first wave of participants will link to T2S in July 2015, but the migration process will last a further two years.
“I think there are still some fundamental challenges that need to bear out,” said Rob Scott, head of custody & collateral solutions, Commerzbank, citing collateral implications, pricing structure and how CSDs operate and interface with each other as a few of the main issues.
Most agree that CSD consolidation is inevitable, even if the timeline is unclear. “T2S is very much a scale game,” Valerie Urbain, CEO of Euroclear France, Belgium and the Netherlands. “And scale is key to create new efficiencies and drive costs down further for the industry.”
“For every market in T2S there is a challenge, and an opportunity,” said Jesús Benito, CEO, Iberclear, the Spanish CSD. “For the Spanish, we have the opportunity to harmonise. It also implies a significant effort for the participants in the Spanish market.” Especially as the country moves from T+3 to T+2, he added.
“The challenge is now teamwork,” agreed Marc Bayle, director general, market infrastructure and payments, European Central Bank. “T2S will be a success not only because of the Eurosystem, but also because the CSDs and banks have done good work reshaping their market and accompanying their clients into this new world.”
This new world will mean a passing of the torch to the market. “Going into the testing phase,” said Scott, “how does it go from an ECB-led project to one led by the participants? I think there are going to be some challenges there. It’s not going to be easy and there will be a long discovery process.”