TARGET2-Securities

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TARGET2-Securities
Annex 2
Jean Michel Godeffroy Director General Payment
Systems and Market Infrastructure ECB
Luxembourg, 19 September 2007
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Outline

• What is T2S?
• What can T2S do?
• Expected effects of T2S on post-trading
• First phase of the project T2S governance
• The project principles and proposals.
  Consultation process
• Moving forward

3
Outline

• What is T2S?
• What can T2S do?
• Expected effects of T2S on post-trading
• First phase of the project T2S governance
• The project principles and proposals.
  Consultation process
• Moving forward

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What is T2S?
A project for

• Europe, implementing the Lisbon agenda
• Supporting to the integration of the market
  infrastructure
• Making cross-border transactions, domestic ones
  in Europe
• Enhancing competition in a financial service
  segment largely based on national monopolies

Making Europe a better place to invest and trade
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What is T2S?
SETTLEMENT INSTRUCTIONS
CENTRAL BANK MONEY
SECURITIES
CSD A
NCB A
CSD A ACCOUNTS
NCB A ACCOUNTS
T2S SETTLEMENT ENGINE
CSD B
NCB B
CSD B ACCOUNTS
NCB B ACCOUNTS
CSD C
NCB C
NCB C ACCOUNTS
CSD C ACCOUNTS
T2S platform
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Outline

• What is T2S?
• What can T2S do?
• Expected effects of T2S on post-trading
• First phase of the project T2S governance
• The project principles and proposals.
  Consultation process
• Moving forward

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What can T2S do?

• Provide a single venue where all EU assets can be
  exchanged for euro.
• Reduce cost of cross-CSD settlement via a single
  settlement platform and standardized
  communication protocols.
• Eliminate financial exposure in cross-CSD
  settlement through central bank money settlement.
• Provide position takers with the ability to
  optimise the financing of long positions and
  borrowing for short sales across all EU assets in
  euro (and other currencies over time).
• Increase efficiency of collateral management by
  the intraday transfer of collateral in securities
  among CSDs over a wide time window
• Support capital markets to provide efficient and
  stable intermediation between buyers and sellers.
• Reduce complexity and associated operational
  costs and risks by harmonizing market rules and
  practices for settlement and settlement related
  corporate events.

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What will change?
CSD
Reporting
Lending
T2S does not segregate custody and settlement
Todays world
Custody
Settlement
Other
Coll. Mgmt
T2S
CSD

• Key success factors
• Right set of messages, queries requests
• Availability
• Response time

Reporting
Lending
Settlement
T2S world
Custody
Other
Coll. Mgmt
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Outline

• What is T2S?
• What can T2S do?
• Expected effects of T2S on post-trading
• First phase of the project T2S governance
• The project principles and proposals.
  Consultation process
• Moving forward

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Expected effects of T2S on post-trading

• Increased efficiency in securities finance,
  reduced cost of funding and collateral management
  have positive effects on liquidity.
• Dynamic effects on trading volumes and liquidity
  due to - increased competition in trading -
  better pricing of securities - unencumbered
  access to settlement
• Further savings from reduced fail rates from
  simplified processing, reduction in operational
  errors and easier management of funds.
• Acceleration in the harmonisation of settlement
  related asset servicing.
• Enhanced competition in servicing assets will
  help investors to reduce cost.
• Reduction in intermediaries back-office costs
  through economies of scale

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Expected effects of T2S on post-trading

• In a nutshell
• Increased market liquidity and access to wider
  investor base lead to
• lower cost of capital for issuers
• Increased market liquidity and lower cost of
  portfolio diversification lead to
• better return for investors

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Outline

• What is T2S?
• What can T2S do?
• Expected effects of T2S on post-trading
• First phase of the project T2S governance
• The project principles and proposals.
  Consultation process
• Moving forward

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First phase of the project T2S governance
ECB Governing Council
PSSC
Executive Board

• 72 persons
• 62 institutions

Advisory Group
National User Groups
14 Users
14 CSDs
Information Sessions with all Stakeholders
14 NCBs
Observers

• 123 persons
• 33 institutions

Coordination Group
TG1 Scope and schedule
TG2 Lifecycle management
TG3 Settlement functionality
TG4 Static data
TG6 Non-functional
TG5 Interfaces

• 188 experts coming from 77 institutions
• All CSDs settling in euro participate
• 33 custodian banks

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Outline

• What is T2S?
• What can T2S do?
• Expected effects of T2S on post-trading
• First phase of the project T2S governance
• The project principles and proposals.
  Consultation process
• Moving forward

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Principles and proposals

• A public consultation on the document T2S
  general principles and high-level proposals,
  defining the nature and scope of
  TARGET2-Securities (T2S), has been launched on 26
  April 2007.
• Market participants were invited to comment by
  end June 2007. We got 57 responses.

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Principles

• Revision of text of the principles as key
  cornerstones of T2S defined by the ECB Governing
  Council
• Main purpose of revisions Achieve common
  understanding
• These clarifications result from
• Consultation process (in particular 25 June Info
  session)
• Issues raised at TG level
• Next step ECB Governing Council to validate the
  clarifications proposed by the AG

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Proposals
Satisfaction per proposal
Proposal number
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Proposals
Statements on proposals
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Proposals - Before the AG

• Assessment of comments by the AG to provide
  guidance to the TGs
• The Project Team classified each of the 67
  proposals into 3 groups before submitting them to
  the AG

35 Green Proposals The AG was invited to
validate them as they were originally drafted
(sometimes with minimal editing changes) 18
Yellow proposals Further debate was deemed
beneficial before taking a decision. The AG was
invited to mandate a specific TG to further
analyse the topic. The AG would then reconsider
the proposal at its September meeting. 14 Red
Proposals The AG was invited to change the
proposal
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Proposals - Before the AG

• The most contested proposals were classified as
  yellow or red, but not asked for validation by
  the AG
• All proposals which had less than 50 of full
  agreement were classified as yellow or red
  (2,23,30,33,35,44,52,57,60 and 67)
• The proposals where validation by the AG was
  suggested had a high level of agreement among the
  responders
• These 35 proposals were fully agreed by 83 of
  respondents on average

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Proposals Main debate

• Proposals 2, 3, 4 and 5
• Original TARGET2 real-time gross settlement
  (RTGS) accounts or sub-cash accounts shall be
  used as cash accounts for T2S.
• Reviewed The cash leg of T2S settlements will
  take place on T2S dedicated accounts. A
  consolidated view on euro liquidity available in
  T2 RTGS accounts and T2S cash accounts will be
  provided. Real-time liquidity transfers between
  T2 RTGS accounts and T2S cash accounts (and vice
  versa) will be possible automatically and on
  demand.
• Agreed
• Main issues
• Discard T2S cash settlement taking place on RTGS
  account.
• Ensure consolidated view on central bank money
  accounts. Automated transfer facilities to
  address liquidity split.

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Proposals Main debate

• Proposal 23
• Original The use of night-time settlement is
  optional
• Suggested review All CSDs are expected to
  maintain the full T2S schedule (including both
  daytime and night time).
• Strong majority in favour of review. Not yet
  agreed
• Main points
• If my market does not currently require
  night-time settlement, why will it do so in 2013?
• Externalities If one CSD closes during part of
  the schedule it delays settlement for users of
  other CSDs (for cross-CSD trades)
• Competitive pressure T2S will provide
  night-settlement in any event restricting the
  offer to their users has competitive implications
  for a CSD.

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Proposals Main debate

• Proposal 30
• Original Instructions can either be matched in
  T2S, or they can enter T2S already matched.
• Suggested review Matching should only take place
  in a central point in T2S. An exception to this
  are pre-matched instructions from exchanges,
  trading platforms and CCPs which may enter T2S
  already matched.
• Not yet agreed
• Main points
• T2S needs to match in any event (cross-CSD
  instructions)
• TG2 proposal Matching for indirectly connected
  participants can be done by CSDs - Technically
  possible, but business case challenged
• Banks view One matching place as close as
  possible to settlement
• CSDs view Explore possibility to re-use their
  matching facilities

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Proposals Main debate

• Proposal 67
• Original Harmonisation and standardisation
  decisions shall be guided by the principle of
  minimising the overall market impact.
• Suggested review Harmonisation and
  standardisation decisions shall be guided by the
  principles of (1) maximising efficiency and (2)
  minimising the overall market impact (in this
  order of priority).
• Agreed
• Main points
• Efficiency first

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Proposals - After the AG
32 Proposals agreed 35 Proposals not yet agreed
and now assessed by TGs
TGs will report to the AG in September
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Outline

• What is T2S?
• What can T2S do?
• Expected effects of T2S on post-trading
• First phase of the project T2S governance
• The project principles and proposals.
  Consultation process
• Moving forward

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Next steps (until May 2008 at the latest)

• Finalization of the User Requirements.
• Economic analysis Intended to be performed at
  all stages of the project.
• T2S internal cost basis and the resulting cost
  per transaction
• Estimation of the adjustment costs
• Identification and estimation of any additional
  costs
• Estimation of the microeconomic yearly savings
• Definition of the governance structure for the
  next phase of the project (the Advisory Group to
  initiate discussions by end September 2007).
• Legal topics under investigation
• Assessment of national legislative and regulatory
  regimes
• Legal setup and governance
• T2S external legal/contractual issues
• ESCB internal arrangements
• Market Consultation.

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An outstanding critical issue The CSDs
participation in T2S

• CSDs may opt out from T2S, but
• which option would be available to users who
  want to opt in while their CSD opts out?
• What kind of information would the CSDs need
  before deciding to join T2S?
• What degree of CSD commitment does the Eurosystem
  need before committing real money in the project?
  

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Conclusion T2S should not be seen in isolation

• T2S is not enough in its own - removal of the
  Giovannini barriersharmonisation of market
  rules and practices.
• Compliance with the Code of Conduct open access
  between all infrastructure components in
  trading/clearing/settlement.
• Whole-hearted co-operation between the
  Eurosystem, markets and regulators (ESCB/CESR).

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THANK YOU