Every Friday, GlobalCustodian.com will interview the biggest and brightest in the securities services industry. The first sees Jean-Michel Godeffroy, chairman of the T2S programme board, ECB, tackle questions on the progress of TARGET2-Securites, the European Central Banks attempt to consolidate the fragmented European settlement landscape by eliminating cross-border transactions barriers.
GC: How much is T2S costing? JMG: The question is a bit premature. We will make our costs public in early September, together with the proposed price list of T2S. As I have said in the past, we will try to make it as low as 0.15 per DvP transaction. In the meantime, the crisis has reduced the volume of transactions by 20%, more or less, so we may not be able to meet the 0.15. It would ultimately depend on how many currencies are joining T2S. To give you a comparison, we have estimated that domestic transactions today are between 0.40 and 0.60 at best, and cross-border transactions are in excess of 2 to 3.
GC: How much effect will the introduction of non-Euro currencies into T2S have on that price? JMG: First of all, let me remind that if non-euro countries bring their currency in T2S, they will obtain the same conditions as the euro countries, and they will contribute to make settlement in Europe more efficient.
From our perspective, the addition of non-euro currencies to T2S would also increase economies of scale and, therefore, contribute to lowering the settlement fees for all T2S participants. We know that there will be some restructuring in the market for example the introduction of CCPs in Scandinavia will drastically reduce volumes there. We consider that, roughly, for 100 transactions in euro, there could potentially be 60 in non-euro in T2S, mostly from UK, Switzerland and Scandinavia.
We insist that our relation with non-euro countries is purely technical; it has nothing to do with politics. There are, however, some questions that need to be answered. We recently had a meeting with central banks of the non-euro countries of Europe to ensure that they feel comfortable with the governance arrangements that we envisage. T2S is unique: the system is run by one central bank, the Eurosystem, but at the same time it has to meet the requirements of several central banks. I hope we find a solution but it requires every side to be open.
GC: How can you make sure the lower fees are going to be passed on to the end investors? JMG: For cross-border transactions, the benefits of T2S should be very visible and very quick. For domestic transactions, the cost reduction may take some more time because CSDs will have to invest before migrating to T2S, and they will not be able to de-commission their legacy infrastructure at once. But if the market works – and you can be sure that public authorities will follow this very closely – custodians will be able to choose their CSD freely, and those CSDs which have not adjusted to T2S will have very hard times ahead of them. In the end, the settlement fees should be the T2S fee plus a small add-on related to customer assistance provided by CSDs.
GC: Will T2S increase risk by concentrating settlement in a single institution?JMG: When consolidating IT platforms, technical risk is always an issue. We are particularly conscious about this and we will mitigate the problem by having a very strong level of resilience (our system will use four different sites).
GC: Why is T2S taking so long? JMG: If you take July 2006 as starting point, when we announced that we were ready to consider the possibility to set up a settlement service, and September 2014 as end-point, when we will process the first transaction, it is only eight years. You may say that eight years is a lot, but imagine a system that has 30 CSDs as direct customers, six or seven currencies, many users, and regulators. The need for coordination is huge, with so many stakeholders, and this necessarily takes time. I am quite impatient, but on the other hand I realise that we need to take longer to discuss issues in depth, so we dont have to go back to these issues later. So far, I am not aware that we have been forced to reopen any issue which has been closed. This is one key condition for this project to be successful.
In short, out timetable will be:
– January 2014: system available to CSDs for testing- September 2014: first CSDs migrates to T2S- September 2015 (tentative) Last CSDs migrates to T2S
We expect the majority of transactions to migrate to T2S in the first half of 2015. This represents a delay from what we announced at the beginning, but it was necessary to adjust the timetable in order to make it stable. There are many projects that fail because of unrealistic timetables.
GC: Who will pay for T2S?JMG: We will have a contractual relationship with the CSDs, and they will pay. They will charge their customers in turn. Basically, it is the customers of the CSDs who will ultimately pay and benefit. We are making our estimates in such a way that we should have recovered our investment about six years after the full migration of T2S, that is, by the end of 2021.
Global Custodian will be running a full article on the progress of T2S, and how it will affect the business plans of Euroclear and Clearstream, in the Summer Plus issue, available in August