Europe’s T2S Settlement Project Faces Yet More Delays

Terry Flanagan

It appears that the already much-delayed new settlement system for large parts of the European Union, which is set to go live from 2015, could face yet more hold-ups.

The European Central Bank initiative, called Target2Securities, or T2S, will provide a single harmonized platform on which almost all heavily traded securities circulating in Europe can be settled. The ECB says that once it is up and running, it aims to substantially cut cross-border settlement costs and make it more competitive with the U.S., which only has one settlement provider.

However, concurrent EU legislation—called the Central Securities Depository Regulation (CSDR)—which is part of an overhaul of the settlement regime in Europe and is set to create a single market for securities settlement, harmonize settlement times to a two-day timeframe and regulate central securities depositories (CSDs), is currently being held up in Brussels.

At present, there are over 30 mainly national CSDs spread across the EU but the European Commission wants to turn this fragmented landscape into a more efficient and better regulated system. T2S also aims to break the monopolies of some CSDs in their home markets and harmonize operations between the CSDs in the region.

Both the T2S and CSDR are thus intertwined and the ECB has acknowledged recently that some parts of the T2S project cannot go ahead until the EU approves the CSDR rules.

Some of the hold-up in Brussels is because two of Europe’s largest CSDs—Belgium-based Euroclear and Deutsche Börse’s Clearstream—believe the CSDR proposals will prevent the international CSDs from providing collateral efficiently to markets.

“Timing is important for our work on T2S and the CSDR,” said Michel Barnier, the European Union’s financial services commissioner, in a recent speech in Frankfurt.

“T2S should be launched in mid-2015. Several aspects of T2S are directly covered by the CSDR proposal. They are complementary. It is important that the Council of Ministers and the parliament adopt the CSD regulation quickly. Its technical standards need to be in place and enforceable before the T2S is launched in mid-2015.

I welcome the European parliament’s commitment of last month. It has adopted its report, prepared by Kay Swinburne [the MEP in charge of guiding the CSDR proposals through parliament] and is keen to start discussions with the Council. We now need rapidly a common position in the Council, so that the institutions can start to work together to reach agreement in the course of this year.”

Jean-Michel Godeffroy, chairman of the T2S board, told the same Frankfurt conference: “What is causing some concern is that progress on the issue seems to have come to a halt in the first few months of 2013.”

He added: “If the regulation is not adopted this year as planned, harmonization will not be able to proceed in several areas of great importance for T2S.”

T2S, which has encountered long delays and disputes since it was launched in 2006, is set to go live in three waves within 18 months from the June 2015 date. And assumptions made in 2007 by T2S, shortly before the financial crisis took hold, also appear to be wide of the mark now and doubts are beginning to grow as to how the project—with some predicting that the final investment for the scheme could top €1 billion—will be able to meet costs and also set transactions at such low levels due to the due to the continued depressed volumes in Europe. The ECB has recently warned that it may have to revise upwards the fees for trades.

And not all CSDs in Europe have signed up to T2S. Despite all of the 17 eurozone nations apart from Ireland signing up to the project, as well as six non-euro countries, the U.K., Switzerland and the Nordic countries have all kept their currencies out.

Still, Mario Draghi, the head of the ECB, told the same Frankfurt conference on March 19 that “in terms of infrastructure, T2S is the necessary platform for setting up a single European market for securities services”.

He added: “In terms of benefits for Europe, T2S will make the post-trade environment safer and more efficient. It will reduce the cost of settling securities transactions and bring about significant collateral savings for market participants. These collateral savings are particularly valuable at a time when demand for high-quality collateral continues to increase, as a result of both the crisis and new regulatory developments.

“But reaping the full benefits from the launch of T2S requires that it is complemented by the provisions laid out in the CSD regulation proposed by the Commission.”

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