T2S Deadline Slips Again as ECB Worries over Weak Trading and Price Impacts

In its latest quarterly update on the Target 2 Securities (T2S) project the European Central Bank (ECB) has extended the migration deadline to the single securities settlement engine in Europe until November 2016. The ECB also admitted that that weak trading in the eurozone may lead to a different charging structure as economies-of-scale volume savings will not be as high as first thought on the trade settlement platform, which is likely to attract lots of bank-administered treasury trades.  

The extended November 2016 migration deadline to T2S is due to concerns about operational safety and resiliency, claims the ECB, which has struggled to get buy-in from the two major European central securities depositories (CSDs) – Clearstream and Euroclear – which will account for almost two thirds of T2S volumes. Both groups will now migrate separately amidst fears that a single migration wave would be problematic. The ECB faced opposition from several users who were understandably concerned about the risk of market disruption if anything went wrong in such an important European-wide single securities settlement engine. The delay, and staggered migration model, is intended to allay these fears. 

The revised idea is for the 23 CSDs which have committed to T2S to relocate their data to the platform in three waves over an 18 months period, starting from the original June 2015 ‘go live’ date. 

The initial wave includes the Maltese Stock Exchange, the Bank of Greece securities settlement system, Romania’s Depozitarul Central, Italy’s Monte Titoli, which is owned by the London Stock Exchange (LSE) Group, and Switzerland’s SIX-SIS. The latter two will provide the biggest volumes in this first wave of migration. 

Next, Spain’s Iberclear, Portugal’s Interbolsa and Slovakia’s CDCP will join from July 2016, alongside Belgium’s securities settlement system NBB-SSS and Euroclear ESES. 

From November 2016, Clearstream Banking (DB1Gn.DE), Austrian OeKB, Euroclear Oy in Finland, LuxCSD, Danish VP Securities and its subsidiary VPLux, Estonia’s AS Eesti Väärtpaberikeskus, the CSD of Lithuania, KDD Slovenia, and Keler Hungary will then join T2S as the final movers. 

According to Marc Bayle, the T2S programme manager: “Migrating to T2S is a complex issue, given the number of actors, the volume of operations, and the risks at stake. For this reason, it was decided from the early stages of the project that T2S migration would not happen as a ‘big bang’”. The operational risks are now more balanced in terms of the migration waves, he added. In other words the huge volumes supplied by Euroclear and Clearstream have now been separated out. 

Fee rethink

The charging structure for T2S is also likely to change after the chair of the T2S board at the ECB, Jean-Michel Goddefroy, said in the quarterly update on 30 November that the settlement volumes from the 23 CSDs committed to the platform are 18% lower than anticipated back in 2010. 

Previously, the ECB had said that fees for trades passed over the European single securities settlement engine would be charged at 15 cents per transaction and that this was a “conservative assumption” based on predicted volume throughputs. These are now down as the eurozone crisis and other factors have reduced securities trading in Europe, forcing a rethink, threatening the creation of a European equivalent of the US’ DTCC facility.  

According to Goddefroy, this gives the T2S board cause for concern, “as one of the underlying assumptions of the T2S pricing policy was that EU volumes would be no more than 10% lower than the projected volumes.” That is not now the case so Goddefroy added, “the board will keep a close eye on this matter and explore all possible ways to avoid increasing fees for T2S users”. Whether this will be possible is debatable as the economies-of-scale realities about volume versus pricing are pretty fixed.

 

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