Securities and securities related payments traffic sent over the Swift network now represent 45% of volumes, making the securities industry the fastest growing sector of the Brussels-based financial messaging co-operative. As a result, securities issues are high on the agenda during Swift’s annual conference, Sibos, attended by nearly 5,000 people in Sydney last month.

A session on securities market reform focused on reform, with Charles Cock, global head of sales and relationships at BNP Paribas Securities Services saying: “An ever-growing number of initiatives are hitting the to-do list of financial institutions and infrastructures including G30, Mifid (Markets in Financial Instruments Directive), Giovannini, the European Commission’s Code of Conduct and Target2 Securities.”

In July, the European Central Bank announced it was considering a securities settlement link to the Target2 real time gross settlement euro payment system. This would enable securities transactions to be settled across the Euro-zone in central bank money. All securities would be settled on a batch basis every hour.

The Target2 Securities (T2S) initiative, headed by the ECB, attracted much interest at Sibos. “Central banks are not good at everything, but one thing they are good at us building market infrastructure,” said Jean-Michel Godeffroy, director general of the bank. He estimated that the implementation of Target2 for securities was at least 10 years away.

Initial responses to the ECB’s plans have been positive, although central securities depositories (CSDs) want more detail. By last month (OCT), banking communities and CSDs of 13 national markets as well as two international central securities depositories, Euroclear and Clearstream, had submitted responses, along with two European banking associations and several central counterparties and stock exchanges.

Euroclear’s submission runs to 38 pages and the Belgian ICSD has cause for concern as it is in the midst of developing its single settlement engine. It’s submission stated: “While Euroclear understands and supports the basic vision of creating a more integrated and efficient European settlement infrastructure, we have a number of questions about the current proposal.”

The ICSD says although the proposal consolidates book entry settlement in one place, it “unavoidably does so” by breaking it away from other CSD functions, principally by separating delivery versus payment settlement from asset servicing (such as corporate actions management) and separating euro settlement from settlement in other currencies.

“The consequences of this fragmentation (and other inefficiencies associated with it) are far reaching. If our reading of the proposals is correct, then the current proposal would not achieve the objectives which it has set out for itself. Overall, T2S could make it more difficult to achieve the Lisbon Agenda for the creation of an efficient single market in financial services,” Euroclear’s submission states.

Euroclear questions whether the proposal is intended as a first step towards consolidation of other CSD activities within the ECB, with a view to ensuring over time that there be a coherent set of rules and governance of the various interconnected services that market participants currently enjoy from CSDs. “This would transform the ECB from a supplier of outsourced services (T2S) into a full CSD which would replace Euro-zone CSDs altogether. The Eurosystem’s intentions in this respect should be made clear to the market.”

Euroclear is not the only CSD to be concerned. Iberclear, the Spanish CSD, stated: “The Eurosystem should clarify as soon as possible the real scope of the T2S and the outcome of the discussions about the so-called integrated model. A necessary level playing field for CSDs must be taken into consideration in this discussion.”

Italy’s CSD Monte Titoli stated that in its start-up phase, T2S should be limited to delivery versus payment on a real time gross settlement basis for cross-border securities transactions. “All other CSD functions (matching, clearing/netting, safekeeping, custody, administration, value-added services) should be out of its scope,” said the company.

A submission on behalf of French banks indicated support for T2S in the belief that it would deliver efficiency and cost benefits. “T2S should become the sole settlement platform for the Euro-zone securities settling in euro central bank money. Most of the efficient European markets are settling securities transactions in a same securities settlement system for equity and fixed income transactions and repos and Ucits as far as France is concerned. So it will be a pre-requisite for T2S to settle all transactions during day or night cycles.

The banks suggested that the system be implemented gradually, in order to minimise operational risks, but it makes more sense to implement T2S, one market infrastructure after the other, rather than per financial instrument, it said. This was because migrating instrument by instrument could require most markets to maintain two interfaces instead of one, and separating equities from fixed income instruments could be problematic, as fixed income products are used as collateral including for equity settlement or for cross-product arbitrage.

The ECB’s announcement of its T2S plans came out of the blue, and the market is still grappling with the implications. Don’t expect consensus any time soon.