The T2S project to harmonise settlement in Europe is moving from theory to reality, as the majority of EU central securities depositories (CSDs) sign up to the framework agreement. Though the 2015 live date seems a long way off, now is the time to start preparing – to assess the impact on your business and operations, to determine your strategy to achieve readiness and to capitalise on the opportunities T2S creates, and to start selecting the partners you will work with to realize your strategic goals around the project. These were among the key messages to delegates at a number of recent T2S-dedicated events in which SWIFT participated, as the level of industry discussion about T2S continues to rise.
At the annual NeMa conference in Budapest in June (view video highlights on the event website), a panel discussion on the impact of T2S, featuring Harry Newman, T2S Programme Director, SWIFT, zeroed in on two of the biggest industry preoccupations around T2S: its impact on cost and its impact on the CSD landscape.
An audience poll on the question, 'How will T2S influence the costs of the settlement industry?', revealed that the majority (55 per cent) believed that the cost of cross-border settlement will decrease, but that the cost of domestic settlement will increase.
Asked how T2S and the CSD Regulation will affect the number of CSDs in the marketplace, the biggest proportion of the NeMa audience (47 per cent) said it will decrease slightly – though a substantial 23 and 18 per cent respectively said it would remain unchanged or would decrease substantially – a division of opinion reflecting the number of open questions in the market about the impact of T2S.
Questions of cost and of impact on the EU landscape were also among the key focuses of the recent Post-Trade Forum on T2S held at the London Stock Exchange, hosted by B.I.S.S. Research and Finextra and sponsored by SWIFT. An impressive line-up of T2S experts - Alan Cameron, Head of Client Segment - Broker Dealer & Investment Banks, BNP Paribas, Helmut Wacket, Section Head, Target 2 Securities Team, European Central Bank, Jan Lemeire, Director, Product Management, Euroclear, Justin Chapman, Senior VP, Northern Trust, Tom Morris, Head of Sales and Relationship Management for Post Trade Services, LSEG and Russell Jones, Head of Securities Initiatives, SWIFT – participated in a lively debate under Chatham House rules, spanning a number of critical considerations for the T2S project.
Is the T2S price-tag worth the benefits it will bring? Is the business case there? Do we know exactly what the benefits will be for end investors? How will the financial outlay for T2S be recouped? Will the number of CSDs fall? Can all CSDs successfully compete in an environment in which settlement is commoditised? How many market participants will self-settle in T2S? Will T2S lead to more unbundling of post-trade processing costs? And is the process of harmonization in the EU really speeding up?
These were just some of the questions debated during the Forum, which also revealed a strong consensus that one of the most important benefits of T2S will be improved collateral and liquidity management. As one panellist said: “Settlement platforms that are very mature do not cater for the precise needs of the markets today, while T2S is being built now, and has modern features like liquidity optimization to help with collateral management. One of the benefits T2S will bring is that the system itself will allow savings in collateral: you won’t need to hold multiple pots of liquidity with different CSDs, just one pot with T2S.” Another echoed this point, saying “cross-border mobilization of collateral is key… and is emerging as one of the biggest benefits of T2S”, while a third added that for investment banks the most important consideration around T2S is whether “they can use it to improve capital, collateral and liquidity management”.
These positive benefits of T2S aside, the Forum debate also revealed a number of concerns around T2S. The question was raised several times as to whether the costs of implementing T2S will be passed on to customers – and whether, to compensate for the loss of settlement business, CSDs will charge more for other activities such as asset servicing. The general view was that the driver of competition will guard against the creation of any kind of “T2S tax” – as one participants said, “If you believe in competition, and I do, that’s where the end investor can save” – but the level of discussion on this topic revealed that this remains an area of uncertainty.
The impact of T2S on the CSD landscape was also hotly debated – with views varying on whether we will see a reduction or an increase in the number of CSDs. As one panelist commented, “At every conference I go to, it is confidently predicted there will be fewer CCPs by the end of the year, and there are always more! I think we will see the same with CSDs: there will be a plethora of them.”
There were also concerns raised that by “climbing up the value chain” to compete, CSDs will be moving into areas of higher risk than that for which they were created to carry out – a possible “unintended consequence” of T2S.
“If CSDs enter into more competition, they will have to go up the value chain, and that will mean taking more risks. Regulatory capital requirements and costs will go up. Is that what we want?” asked one panelist. “Even if CSDs want to do that, not all will be able to,” he added. “There will be some competition between CSDs, but realistically only a few have a chance to succeed. To be active in foreign markets, in competition with local agent banks, requires very significant investments. Hopefully it will lead to more competition, but only for a few lucky ones.”
An audience poll during the T2S-focused session at the European Clearing & Settlement (ECS) conference in London in June sought to further clarify this question around competition between CSDs. Asked, “If the result of T2S is competition, how big is the chance that users will really change CSDs in the medium term?”, the majority – 58 per cent – said there was a 50 per cent likelihood of this happening. Commenting, Ben Parker, Commercial Director, UBS, said: “Competition is good, but there isn’t a level playing field among CSDs. I struggle to see how some of them will be able to offer really sophisticated services. They are also challenged by the dilemma that the CSD Regulation will in some cases stop them from competing.”
T2S is interesting for investment banks like UBS, he continued, because it presents opportunities for them to consolidate the number of agent banks they use and to self-settle – in order to achieve the lowest possible cost per settlement. “For the past two years we have been looking at opportunities to move to that model, going through a number of iterations, to the point at which we self-settle but continue to buy asset services from a custodian,” he told delegates.
The session at ECS was centred specifically on what market participants need to be doing today in anticipation of T2S, because – as Helmut Wacket from the ECB said – “2015 seems a long way away, but now is the time to prepare’. Giving the SWIFT view, Russell Jones commented: “From our perspective, we are seeing a race for budget. We are being deluged by customers wanting to discuss the implications of T2S for their infrastructures. They are examining the different business models they could adopt, and want to know the impact from an infrastructure point of view. Settlement will move from a distributed model to a concentrated model – and, as a buyer, you rightly expect different pricing in a concentrated model.”
As Parker from UBS pointed out, “it took everybody a bit of time to understand the importance of T2S”: the discussions at these events showed that while the importance of T2S is now well understood, there are still many questions about the long-term impact, questions which market participants need to try to start answering now in order to shape their future business models accordingly.
For more on the assessing the impact of T2S on your business, check out the recent interview between Finextra and SWIFT’s Harry Newman, and SWIFT’s “T2S in 90 minutes” (and other T2S training resources).