Ahead of a final decision, expected in June, regarding approval of the Target2 Securities (T2S) initiative of the European Central Bank (ECB), European clearing and settlement organisations appear to accept it as a reality.
T2S is a securities settlement system based on the Target2 real time gross settlement system for euro-zone payments. Due to launch in 2013, it will provide a single platform for settling both cash and securities transactions in euro.
T2S is a driver of Link Up Markets, a joint venture between seven central securities depositories (CSDs), says Tomas Kindler, managing director of the Madrid-based company. “T2S is changing the landscape for CSDs, centralising settlement in central bank money on a platform operated by the euro system. As a result, national CSDs will lose 30-50% of their total revenues. In order to survive, they will have to change their business models by building cross-border processing capabilities in asset servicing and value added services.”
The CSDs initially signed up to Link Up Markets are Clearstream Banking Frankfurt (the CSD, not Clearstream Luxembourg, the international CSD), Hellenic Exchanges in Greece, Spain’s Iberclear, Österreichische Kontrollbank in Austria, Swiss ICSD SIS SegaInterSettle, VP Securities Services of Denmark and VPS from Norway.
Each participating CSD will take an equity stake in Link Up Markets. Between them, the seven CSDs processed €156m transactions in 2006, representing almost a half of all European securities, and have €12trn in assets under custody.
The aim of the venture is to improve interoperability between the participating CSDs with a single point of access for customers. The venture claims it will be able to reduce cross-border settlement costs by up to 80%.
Link Up Markets will work by establishing a common infrastructure allowing for “easy implementation of links between CSD markets and introducing efficient cross-border processing capabilities”, according to the venture. By connecting to the common infrastructure, each participating CSD has access to the services of the other participating markets across all asset classes except derivatives. The initiative is open to all domestic CSDs.
Link Up Markets will absorb any differences in communication standards across the markets while leveraging the existing infrastructures and processes of CSDs. As a result, the solution can be provided quickly and with minimal adaptations for the participating markets, says the company.
The participating CSDs have an ambitious schedule - Link Up Markets will be launched in the first half of 2009. ICSD Euroclear is harmonising and integrating five markets on to a single platform, a process, which began in 2006 but not due for completion until late 2009 or early 2010.
Bob McDowall, senior analyst Europe at financial industry analysts Towergroup, is sceptical about the Link Up Markets timetable. “Clearly there have to be some technical links to be established and there will also have to be negotiations on tariffs,” he says. “Optimistically, this would take a few years because the devil is in the detail.”
Kindler says Link Up Markets “is not building another settlement engine” but is leveraging existing infrastructures. Any differences in market standards will be absorbed by the common infrastructure. “For example, if one market uses ISO 15022 and the other uses proprietary standards, the Link Up Markets infrastructure will map the fields and ensure the two markets can communicate with each other,” he says.
In a research note published last July, McDowall wrote that T2S represented an “overt move by the public-sector European Central Bank to take a guiding position over the future development of cross-border securities clearing and settlement in the euro-zone and possibly within the European Union as a whole”. At that time, the private sector had “no solution” to respond on a commercial basis immediately or in the short to medium term to high tariffs on cross-border clearing and settlement.
The European Commission and the ECB are determined to improve the fragmented state of European clearing and settlement. There are still 18 securities settlement systems in operation in the euro area, for example. To date, the Commission has not imposed a directive to sort out clearing and settlement - something that the industry would view with horror. But unless the aforementioned initiatives deliver cheaper cross-border settlement, a directive cannot be completely ruled out.