| ECB officially launches T2S |
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| In July 2008, the Governing Council of the European Central Bank decided to officially launch the TARGET2-Securities (T2S) project and confirmed the provision of resources required until its completion. The EU Presidency and Commission welcomed the ECB’s decision, stating that the project can contribute to one of the EU’s main objectives in financial services, “to promote integration, transparency and competition in clearing and settlement”, writes Hugh Friel of the Irish Banking Federation. |
T2S is seen as a significant step in reinforcing the Lisbon agenda and in particular the Code of Conduct on Clearing and Settlement and harmonisation efforts through the Giovannini process. It is a technical platform to support Central Securities Depositories (CSDs) by providing core, borderless and neutral settlement services. The objective is to achieve harmonised and commoditised delivery-versus-payment settlement in central bank money in euro (and possibly other currencies) in substantially all securities in Europe. CSDs are the gateways through which market participants can access T2S services and will therefore maintain their relationships with intermediaries, investors and issuers as well as their asset servicing function. | | Hugh Friel |
A Walk through T2S
The T2S project began on 7 July 2006, with the ECB’s announcement that it would explore the possibility of establishing a new service for security settlement in the euro area. The ECB pointed to the lack of progress, in the eight years since the introduction of the euro, in developing an efficient, integrated securities infrastructure that would support the operation of a single market for financial services in Europe.
A feasibility study was embarked upon, in cooperation with market participants (including CSDs and their users) and public authorities (in particular ECOFIN, European Commission and European Parliament) aimed at establishing if the T2S proposal was operationally, technically, economically and legally feasible. Based on the results of the study, the Governing Council of the ECB concluded, on 8 March 2007, that it was feasible to implement T2S and decided to progress to the next stage of the project, the definition of User Requirements.
The User Requirements were prepared during the summer of 2007. Seven mini-consultations were conducted by the various Technical Groups (TGs) asking for feedback from the National User Groups and relevant European associations. The objective was to draw on the wealth of expertise in the various markets in order to define the features required by CSDs and financial market participants for core, borderless and neutral settlement of securities in Europe.
Following extensive consultation, involving hundreds of experts across 80 institutions, the first User Requirements Document (URD) was published on 18 December 2007 and was subject to market consultation until 2 April 2008. ECB received a total of 67 responses consisting of 2,300 individual comments (all comments are published on ECB website [http://www.ecb.eu/paym/t2s/html/index.en.html]). The URD was revised where necessary and appropriate and the final version was then submitted to the ECB decision making bodies.
In parallel with the development of the User Requirement, an Economic Impact Analysis (EIA) has been completed, based on figures compiled and collected during the first quarter of 2008 and the results are published on the ECB website. The results of the economic impact analysis suggest that T2S has the potential to bring benefits both to securities market participants and to the European economy generally.
Banks and CSDs respond
The European Banking Federation, of which the Irish Banking Federation is a member, has expressed its strong support for the continuation of the T2S project. The banking community recognises T2S as integral to the creation of a single market in post trading, thus facilitating the continuing integration of Europe’s financial markets. The EBF has commended the governance structure followed to date and encouraged the ECB to maintain the inclusive and transparent consultative process established during the definition of User Requirements stage. Given the strong interest of banks in T2S it is essential that the EBF has suitable representation in the governance structure going forward. The EBF has outlined banks’ strong support for settlement in European currencies other than the euro from the outset and encouraged the ECB to continue efforts to accommodate this possibility. The EBF will closely monitor how the principles set out in the URD are applied once T2S is operational.
The Irish National User Group responded to the ECB request for feedback on the User Requirements. Of particular concern from an Irish perspective is how the current arrangements whereby the Irish market settles in both Sterling and euro could be maintained going forward.
On 23 May 2008, the Governing Council of the ECB issued a proposal to all European CSDs to join the T2S initiative. CSDs were asked to inform the ECB if they support the continuation and finalisation of the T2S project and whether they are willing to enter into negotiations to conclude a contractual arrangement by the end of the first quarter of 2009.
Subject to certain conditions expressed in their replies, almost all euro-area CSDs, representing a very large share of settlement activity in the euro area are in favor of the continuation of the T2S project.
Euroclear UK & Ireland has played an active role in the T2S debate and has posed a number of questions in relation to the cost of the project and the pricing level and structure of T2S services to CSDs. The legal structure of the T2S operator and the governance of T2S after its launch are “open issues” which also require further work.
Next Steps
The next stage of the T2S project is the “specification stage”. This stage involves the development of the General Functional Specification (GFS) and is expected to last until the end of 2008. The T2S governance arrangements will remain largely unchanged for the specification stage. The ECB aims to commence live operation of T2S no later than 2013. |
Hugh Friel is Advisor, Wholesale Banking and Risk with the Irish Banking Federation.
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