Bob Currie reports on advances in the project design and challenges in meeting the ECB’s proposed timeline, through which T2S will be ready to be used by the first group of CSDs by September 2014.

1. TARGET2-Securities
TARGET2-Securities
Project Design:
A Progress
Review
A key milestone in the development of the TARGET2-Securities
(T2S) project during the next 12 months will be the adoption of
the Framework Agreement by the Governing Council in Jan 2011
and then by CSDs in April 2011. Bob Currie reports on advances in
Financial Services Research July 2010
the project design and challenges in meeting the ECB’s proposed
timeline, through which T2S will be ready to be used by the first
group of CSDs by September 2014
In 2006, the European Central Bank (ECB) announced plans project build and it will extend the resources required for its
to develop a centralised settlement solution for all euro- completion. Subsequently 27 CSDs signed a Memorandum
denominated securities transactions and all CSDs in the of Understanding in April 2009 declaring their support for
euro-area, with potential for non-euro area CSDs to join if the T2S programme and confirming – subject to appropriate
demand exists (for background, see FSR, July 2007, pp 34- contractual arrangements being agreed with the Eurosystem
51; FSR, Q3 2008, pp 32-47). In July 2008, the Governing as owner and operator of the platform – that they would
Council of the ECB confirmed, on the basis of consulta- outsource securities settlement (for euro-denominated and
40
tion with T2S stakeholders, that it will proceed with the some non-euro securities) to the T2S platform.

2. TARGET2-Securities
However, an important step towards the from a CSD standpoint, there is a need to
final T2S project design will come during the finalise the legal contract that will specify
next 12 months, when the ECB Governing the terms on which CSDs outsource set-
Council aims to clarify the project gov- tlement of securities transactions to the
ernance – as defined in the forthcoming T2S platform. Alongside this, CSDs are
Framework Agreement – and CSDs are asked seeking clarification of the price schedule
to make a legally-binding commitment to and service agreement that will be offered
the programme. Still, at this time, we note by the T2S operator. Lemeire points out
some uncertainty on the part of CSDs and that ongoing discussions relating to the
users regarding the T2S governance, pricing terms of the outsourcing agreement remain
and the terms on which they will outsource confidential at this stage between the CSDs
settlement functions to the T2S operator. As and the Eurosystem. Within this debate,
we note from the interview with Jean-Michel CSDs have sought to clarify whether the
Godeffroy, Chairman of the T2S Programme agreement will be a standard outsourcing
Board at the European Central Bank (pp 34-9 arrangement under private company law,
in this issue), we can expect to see these de- or whether this will take a different form
tails clarified by Q2 2011 in preparation for a given that CSDs will be outsourcing to a
first wave of CSDs settling live trades via the public authority. Most CSDs have taken the
T2S platform from September 2014. position that this should be a standard out-
sourcing agreement under private company
Framework Agreement law. “As a CSD, the liabilities we bear in
Indeed, the ECB indicates that a key mile- delivering settlement services to CSD par-
stone in the development of T2S will be the ticipants will remain largely unchanged,” he
adoption of the Framework Agreement by explains. “However, we await clarification
the Governing Council in Jan 2011 and then regarding the level of liability that the T2S
by CSDs in April 2011. Jean-Michel Godeffroy operator will bear in instance of technical
reports that the ECB continues to negotiate or operational failures.”
the programme governance with key stake-
holders, including central securities deposi- Andreas Wolf, Chief Operating Officer at
tories, central banks, national regulators and Clearstream International SA and Chief
potential users of the system. This project Executive of Clearstream Banking Frankfurt
presents some complex legal challenges, AG, reports that, from Clearstream’s posi-
given that there have been few previous tion, the principal issues for attention have
examples of situations where private sector remained the same for some time. There is
companies have outsourced processing func- need to establish greater clarity around the
tions to a public authority. Some CSDs have governance framework for T2S and particu-
maintained that the outsourcing contract larly to clarify the terms on which CSDs will
should be a standard outsourcing agreement outsource securities settlement to the T2S
under private company law. The Eurosystem platform. Wolf notes that for Clearstream
leans more towards a public task model. Banking Frankfurt, for example, further
Godeffroy believes it important to find a detail is required in this area to ensure that
Financial Services Research July 2010
solution in the centre ground between these it can maintain its service commitments to
two positions, drawing on the strongest CSD participants and that it meets its regu-
elements of each of these models. “All par- latory obligations as CSD and as a licensed
ties to the consultation have been open in credit institution regulated by the German
sharing their priorities and concerns and we Banking Act. Second, the pricing schedule
are confident that such a solution can be for T2S still has not been announced.
established in the timeframe we have pro- Stakeholders require a detailed breakdown
posed, whereby the Framework Agreement of the pricing model offered by T2S in
is scheduled for approval by the Governing order to make an accurate assessment of
Council in January 2011 and then put to the the T2S business case and the potential
CSDs in April 2011,” he says. cost savings offered by the platform.
Jan Lemeire, Director of Product John Gubert, External Advisory for Unicredit
41
Management at Euroclear, agrees that, Global Securities Services, asserts that

3. TARGET2-Securities
the first step in tabling the Framework project will not in any way compromise
Agreement will be to define the business and their oversight of currency or monetary
technical specifications that will guide the policy operations.
operation of the T2S platform. This process,
he anticipates, is likely to proceed relatively From a user perspective, KAS Bank’s Brink
smoothly: the core functional content of indicates that users are pushing for an
the T2S project has been mapped out and efficient and stable service at an appro-
the next stage is to clarify the detail around priate price. “That is a mantra that we push
these core principles. Though not all T2S constantly through consultation forums in
stakeholders will agree precisely on the form which we are active,” says Brink. “Along-
that these functional specifications should side other stakeholders, we also seek clari-
take, Gubert predicts that we are likely to fication around the development strategy
see a workable solution set in place without for the T2S project, how this will be funded
significant delay to the project timeframe. and the degree to which this may influence
our future ability to innovate.”
The task of defining the contractual
arrangements that will guide the T2S project FSR asked Henk Brink whether these con-
is destined to be more complex. The T2S sultation forum are providing an effective
platform will be owned and operated by the avenue through which users can articulate
Eurosystem. However, discussion is ongoing their needs and concerns? “Proof of this
regarding the contractual arrangements will come when the project is delivered,” he
through which CSDs will outsource transac- responds. “We take advantage of the prin-
tion settlement to T2S and the degree of cipal avenues available to us – including our
liability that the T2S operators will bear in National User Group. We also discuss these
instance of technical or operational failure. issues in our regular meetings with the
The ECB has indicated in earlier public regulators in order to provide input to the
statements that it does not view T2S as a consultation process. The ECB has assured
conventional outsourcing contract under pri- us that it understands our needs as users of
vate company law – and, by implication, the the system. But ultimately this will only be
Eurosystem may be unwilling to take on the verified when we see the final design of the
liabilities that typically would be borne by a platform and have a clear idea of how well
supplier in an outsourcing agreement. the operating model matches up against
the efficiency benefits that were promised
In considering the governance around to us when the project was announced. In
the T2S project, KAS Bank’s Director of particular, we will monitor the liability para-
Securities Services Henk Brink observes that graphs in the Framework Agreement closely
the primary stakeholders each have slightly in order to see how much liability will be
divergent interests. The Eurosystem, as borne by the T2S operator in instances of
owner and operator of the platform, aims technical failure and how much risk and
to deliver a smooth and efficient imple- liability will be passed through to the CSDs
mentation of the project, but is also keen and their users.”
Financial Services Research July 2010
to recover its investment and has specified
that the project be built on a full cost re- “If technical problems are experienced
covery basis. CSDs are seeking reassurance with the T2S platform, it is crucial that we
that they will be able to maintain efficient know on which doors to knock in order to
management of customer accounts when seek redress,” explains Aletta Oostenbrug,
securities settlement is outsourced to the Senior Business Consultant at KAS BANK.
T2S platform. Also, CSDs seek confirmation “Equally importantly, we must ensure that
that they will not be exposed to additional we will not be required to bear liability for
risk or liability resulting from technical or any operational problems that we as users
operational failure at the T2S platform. have not caused and over which we have
no direct control.”
In turn, central banks seek assurance
that procedures for CeBM settlement via Unicredit External Advisor John Gubert
42
the T2S platform are robust and that the observes that the Eurosystem will bear

4. TARGET2-Securities
considerable reputational risk as owner and during the 1990s when establishing how
operator of the T2S platform and this in much liability should be borne by CRESTCo
itself will provide a strong incentive to en- in managing settlement of UK-listed securi-
sure that the project is operationally robust ties on the CREST platform. In this instance,
and technically resilient. “We cannot afford CRESTCo came to an arrangement with
any outages!” he emphasises. However, CSD participants whereby it assumed an
the level of financial liability borne by the aggregate £20 million (later raised to £40
Eurosystem still needs to be confirmed. Sev- million) initial liability against any single
eral competing scenarios appear possible. event of system failure, with any additional
The Eurosystem might bear full liability for liability borne by users of the platform.
any losses incurred as a result of technical However, that liability was limited to acts of
or operational failures on the platform. negligence, wilful default and fraud.
Alternatively, the Eurosystem may refuse to
bear any liability for losses on the platform, But does the proposed T2S governance
such that this risk is carried by CSDs – and offer freedom for a CSD to employ alterna-
Andreas Wolf, ultimately this may be passed through to tive settlement provision, should the out-
COO Clearstream International
SA and CEO Clearstream Banking
CSD participants and, potentially, on to the sourced service offered by T2S fail to meet
Frankfurt AG end investor. Or, thirdly, the Eurosystem with required standards? Clearstream’s
might bear limited liability, such that its Andreas Wolf responds that under an inte-
risks are capped at a pre-defined level, with grated CeBM model as currently run in the
any additional losses borne by the CSDs and Euroclear ESES markets – whereby a central
potentially passed through to their users. bank agrees to outsource the technical op-
This project presents some complex legal challenges, given that there have been few previous
examples of situations where private sector companies have outsourced processing functions to
a public authority. Some CSDs have maintained that the outsourcing contract should be a standard
outsourcing agreement under private company law. The Eurosystem leans more towards a public
task model.
For Gubert, the third option appears to eration of some of its accounts to the CSD,
offer an acceptable solution. Indeed, there enabling the CSD to move central bank
is precedent for such a scenario. He believes money from one member account to an-
it appropriate that the ECB, through the other as payment for delivery of securities –
Eurosystem, should bear some financial risk if this will not be possible anymore. How-
the T2S platform experiences technical failure ever, the Economic and Financial Affairs
or fails to meet operational requirements. Council (EcoFin) has concluded that there
Financial Services Research July 2010
CSDs are typically lowly capitalised compa- must be competition in a T2S world which
nies that are fundamental to the secure and can then only take place in an interfaced
efficient functioning of capital markets. Thus, CeBM model. And in offering central bank
CSD participants will be reluctant to see money settlement under such an interfaced
CSDs taking on significant liability through model, it seems possible that any CSD could
the outsourcing contracts that they sign with retain its existing settlement system in the
the T2S operator. In turn, investors may be background and bring this into operation if
reluctant to put up capital, or commit to and when required. This will enable CSDs to
putting up future capital, to cover this risk retain a contingency provision, should any
at the CSD, given the limited return that this operational difficulties develop with the T2S
capital commitment is likely to generate. platform.
Looking historically, a comparable debate Florence Fontan, Head of Public Affairs at
43
took place in the UK post-trade arena BNP Paribas Securities Services, is clear that

5. TARGET2-Securities
the drafting process for the Framework tionship with the T2S operator and the level
Agreement must adhere to a strict time- of liabilities they will bear in instances of
table and must be brought to a prompt operational failure at T2S. However, Fontan
conclusion in order to sustain the mo- contends that CSDs bear only limited
mentum that has been established behind liability to their CSD participants – for ex-
the T2S project. The Framework Agreement ample, Euroclear Belgium, Euroclear France
will define the relationship between CSDs and Euroclear Nederland provide only a lim-
and the T2S operator, along with linkages ited liability to CSD participants if there is
with central banks in order to support a failure on the ESES settlement platform –
CeBM settlement of securities transactions. and she believes there is no reason why the
Fontan believes it important that these T2S operator should offer higher levels of
arrangements have sufficient flexibility to liability to the CSDs than the latter extend
accommodate any significant changes or to their own CSD participants. “On balance,
contingencies that might materialise as the CSDs must not be allowed to enter into
T2S platform is built and delivered. detailed debates around risk and liability
In tabling this agreement, Fontan deems simply to delay the project,” she says. Henk Brink,
Director of Securities Services,
it essential that users are fully involved in KAS BANK
shaping the project governance and that Separate legal entity
they have right of veto to ensure that there At the T2S Advisory Group meeting in De-
is no slippage from the user requirements cember 2009, there was extensive discus-
that were frozen by the T2S Programme sion around the appropriate governance
Board in January 2010. This is important of T2S both in the development phase and
If technical problems are experienced with the T2S platform, it is crucial that we know on which
doors to knock in order to seek redress. Equally importantly, we must ensure that we will not be
required to bear liability for any operational problems that we as users have not caused and over
which we have no direct control.
in order to ensure that T2S delivers its in the live phase. Early on in the project,
intended benefits to users of the platform. some stake holders raised the question of
“In driving this process, we are aware that whether T2S should become a separate
some CSDs are still uncomfortable with legal entity for governance purposes and,
the prospect of outsourcing settlement indeed, EcoFin in its meeting in February
of euro-denominated, and potentially 2007, suggested such an arrangement
some non-euro denominated, securities might be explored. As a result, the AG
to T2S,” she says. “But it is important that agreed to set up a task-force to look into
this unease on the part of some CSDs what the potential objectives and approach
Financial Services Research July 2010
does not obstruct the T2S project design of such an entity might be. The Chairman,
and implementation. Thus it is crucial in Jean-Michel Godeffroy, asked Marye
tabling the Framework Agreement that we Humphery, Advisor to Morgan Stanley, to
retain clear sight of general harmonisation chair that task force.
principles that overarch the programme.
CSDs must not be allowed to obstruct the Marye Humphery explains that there are
project by challenging small details within strong views both for and against the idea
the Framework Agreement in order to avoid of a separate legal entity. The most impor-
the need to change their operating models tant point, she notes, is that this exercise is
or to decommission existing settlement part of a process to develop the best pos-
platforms.” sible governance model for T2S. A separate
legal entity is just one possible approach.
Specifically, some CSDs have requested de- “We should be working towards a solution
44
tailed explanation of the outsourcing rela- that will allow T2S to deliver its full promise

6. TARGET2-Securities
and potential, which is to provide seamless, the running phase without contemplating
efficient, low-cost domestic and cross- the setting up of a separate legal entity,
border settlement capability for Europe,” but with the intention to find appropriate
she says. “The governance model should ways to involve CSDs and non-euro central
not only be about the project as it is now: banks. “We are confident that the views of
it should be sufficiently flexible and robust non-euro central banks will be well heard
to cope with the strategic developments of under the framework we are proposing to
the future. We do not know how Europe them,” he says.
is going to develop during the next three
years before T2S is delivered, let alone Clearstream has remained neutral on the
during the next 10; the only thing we know question of whether a separate legal entity
for sure is that change will continue apace.” should be established, believing this to be
The mutualisation delivered by T2S will bring major efficiency benefits, in terms of reduced
settlement costs and reduced cost of systems adaptation, regardless of whether it embraces
GBP-denominated (and other non-euro denominated) securities. This position is substantially better
than the existing status quo – the highly fragmented environment that we are forced to work in
currently.
Reporting back on these deliberations, the an internal question for the Eurosystem and
ECB’s Jean-Michel Godeffroy indicates that one that will not change the external gov-
Marye Humphery presented a well bal- ernance of the project. The ECB Governing
anced report to the T2S Advisory Group in Council confirmed in 2007 that the T2S
December 2009 that summarised key posi- project will be fully developed and oper-
tions regarding the creation of a separate ated by the Eurosystem and there will be
legal entity. During these negotiations, no direct involvement by private companies
some non-euro central banks declared their in the design, build or operation of the
support for an SLE, believing that this frame- project, other than in an advisory capacity.
work would allow them greater influence In this context, Andreas Wolf notes that
over the future direction of the T2S project. there is limited value in establishing a
In turn, some users of the system appeared separate legal entity to govern the activities
to support an SLE on the grounds that this of T2S, given that this entity would re-
would provide the best means through main subject to the decision making of
which they could persuade non-euro central the Eurosystem and therefore to the ECB
banks to commit to T2S. In contrast, a Governing Council.
number of euro-currency central banks were
Financial Services Research July 2010
firmly opposed to the creation of an SLE, BNP Paribas’ Florence Fontan notes simi-
perceiving that the Eurosystem is taking on larly that the general principles for the
considerable responsibility as owner and T2S project, which were approved and
operator of the T2S project and wishing to published by the ECB Governing Council in
ensure that the ECB Governing Council re- April 2007, established that the Eurosystem
tains full responsibility for services provision. will take on responsibility for developing
and operating T2S by assuming full owner-
“On balance, we concluded within the AG ship. Consequently, whatever governance
that there was little unconditional support structure is set in place to guide the day-
for the creation of a separate legal en- to-day operation of T2S, ultimate decision
tity,” explains Godeffroy. In its April 2010 making power will lie with the Eurosystem.
meeting, the Governing Council requested As such, it is not clear whether the separate
that the Programme Board will continue legal entity model can work. “Nevertheless
45
the elaboration of the T2S governance in we agree we need financial transparency

7. TARGET2-Securities
and this can be delivered by a separate command to guide the day-to-day opera-
legal entity or by specific accounting within tions – and it is logical that this should lie
the same legal entity,” she says. “Hence with the ECB, given its position at the heart
we remain agnostic to this development, of Eurosystem which is the owner and op-
believing that it will be possible to deliver erator of the T2S platform.
financial transparency without the need to
establish a separate legal entity.”
Full cost recovery
A higher priority, suggests Fontan, is the T2S is being designed and built on a “full
need to streamline decision-making chan- cost recovery” basis. This raises important
nels that enable stakeholders to influence questions regarding the economic implica-
the T2S design and operation. “During the tions of T2S for participating CSDs and
project mode, we currently have a six- other key T2S stakeholders in Europe. Will
monthly meeting with the ECB Governing stakeholders realise the cost savings that
Council in order to provide our input into were forecast in early economic impact as-
the design process,” she explains. “How- sessments for T2S? Or might T2S implemen-
ever, when the platform becomes opera- tation translate into a major overhead that
tional, it is vital that a more efficient and Europe’s financial services industry will be
Jan Lemeire,
responsive decision making process is set paying off for years to come – resulting in Director, Product Management,
in place such that we can react promptly to higher, not lower, overall cost of processing Euroclear
any operational difficulties or shortcomings securities transactions? Hugh Sachs
in the project design.” Simpson, ECB Senior Consultant, forecast in
2008 that in a low volume case, where only
Unicredit External Advisor Gubert does half of eurozone securities transactions are
identify certain benefits deriving from the settled through T2S, then T2S costs will be
corporate structure that a separate legal approximately €100 million and user savings
entity might offer. Under this arrangement, approximately €40 million. In a high volume
a Board of Directors will be responsible for scenario, involving all eurozone settlement
day-to-day governance issues associated transactions plus GBP, CHF, DNK and SKK
Now is the time for agent banks and CSDs to seize the opportunity to make the next stage of the
business case to the user community. It is time for incumbents and new entrants to volunteer
proposals for lower fees and improved market efficiency. Why does this matter? Because lower fees
increase liquidity, minimise market impact and, ultimately, improve investment performance for
issuers and end investors.
Financial Services Research July 2010
with the T2S platform. The ECB will serve transactions, the predicted cost of T2S will
as facility manager for the T2S project, in be €140 million and market savings would
a similar way that Morgan Guaranty used be expected to be €110 million (see FSR, Q3
to serve as facility manager for Euroclear 2008, p 44).
in the period after its inception. However,
at this stage there appears to be limited For Ulf Noren, Global Head of Sub- Custody
appetite from key T2S stakeholders (mainly Client Relations, GTS Banks at SEB Merchant
ECB and the NCBs) for such a corporate Banking, pricing issues remain fundamental
structure and this appears unlikely to secure to the success or failure of T2S. ECB repre-
approval. Whatever governance model is sentatives have indicated that T2S pricing
adopted by the T2S project, notes Gubert, might be €0.15 - €0.25 per transaction and
the key is to ensure that users are involved have questioned whether a €0.05 or €0.10
actively in the design and operation of the difference in the settlement cost will make
46
platform. There must be a single line of a big difference to users of the system.

8. TARGET2-Securities
“The answer is yes, the difference between T2S is being designed as a lean settlement
a €0.15 fee and a €0.25 fee per transac- system to which CSDs intend to outsource
tion will matter greatly to us,” he responds. settlement of euro-denominated, and
“Moreover, we are uncertain at this stage perhaps other, securities transactions.
whether this will represent the end fee However, Euroclear’s Jan Lemeire is em-
paid by the CSD participant for transac- phatic that most CSDs will need to retain a
tion settlement, or whether this will be the large part of their core settlement systems,
charge paid by a CSD to outsource securities and will only be able to decommission
settlement to the T2S platform. If the latter, a small segment of them once T2S goes
we can expect additional cost to be added live because these systems are required to
by the CSD to cover data storage, the need support other processing activities. A lean
to maintain client service staff to support T2S means that market-specific processing
transaction settlement, and so on. In short, services, such as stamp duty collection,
until we have clear indication of the prices registrations, physical security deposits/
that we will pay ultimately to each CSD for withdrawals, trade confirmations, among
settling transactions in a T2S environment, other functions, will remain on the CSD
it is difficult for us to advance further with legacy platforms. In addition, as originally
our strategic planning. Any differences in expected, the CSD legacy systems will serve
Florence Fontan,
Head of Public Affairs, BNP pricing between participating CSDs will be as platforms for added-value CSD services,
Paribas Securities Services important in determining how we process such as collateral management and other
settlement flow and, more broadly, how we asset servicing functions, which rely on core
structure our multi-market service offering.” settlement functionality and/or results.
It is appropriate that the ECB, through the Eurosystem, should bear some financial risk if the T2S
platform experiences technical failure or fails to meet operational requirements. CSDs are typically
lowly capitalised companies that are fundamental to the secure and efficient functioning of capital
markets. Thus, CSD participants will be reluctant to see CSDs taking on significant liability through
the outsourcing contracts that they sign with the T2S operator.
KAS BANK’s Henk Brink suggests that Unicredit’s John Gubert also questions how
the business case advanced in the T2S far CSDs will be able to realise significant
Economic Feasibility Study looked promising cost savings by decommissioning their
when this was first published. This referred existing settlement platforms. Some CSDs,
to cross-border settlement via the T2S especially those that are part of the two
platform potentially being offered at 90 per major ICSD groups, will need to retain their
cent lower fees. However, these estimates existing settlement systems (either in full or
Financial Services Research July 2010
were based on 2007-8 settlement volumes in part) in order to support settlement of
and inevitably the global financial crisis has non-euro denominated securities, or to sus-
caused settlement activity to drop off signif- tain data management required by CSDs to
icantly since this business case was drafted. deliver value-added services to their users.
Moreover, he believes it difficult to make Though some CSDs operate modular sys-
a rigorous cost-benefit analysis of the T2S tems that will enable parts of their settle-
programme until we have further indication ment infrastructure to be decommissioned,
of which CSDs will outsource to the T2S. If the legacy settlement infrastructure that
settlement of GBP-denominated securities other CSDs have in place does not offer
through Euroclear UK & Ireland is out- this level of flexibility. Consequently, they
sourced to the T2S platform, for example, will be forced to retain the existing legacy
this will substantially improve the scale ben- technology, or to engage in costly platform
efits extended by the platform. However, upgrades in order to support users’ needs
47
UK participation is far from certain. in a T2S environment. Though the headline

9. TARGET2-Securities
figure for the T2S build is in the region of cient as that offered by the local issuer CSD.
€250 million, Gubert suggests it is likely Thus, Lemeire believes it important that T2S
that aggregate cost to the marketplace will stakeholders work collectively to eliminate
be well in excess of this figure, potentially inconsistencies in market practices and to
€750 million to €1000 million. ensure that full interoperability is achieved in
T2S between CSDs, including those that are
In assessing the T2S business case, KAS part of vertical silos. This collective effort is
BANK’s Brink underlines the need to look important to ensure that T2S delivers the full
beyond the immediate technical functions efficiency benefits and cost savings that have
delivered by the T2S platform. The future been targeted since the project’s inception.
efficiency of securities processing in Europe
will be contingent also on the industry’s At this time, there is still is conjecture
ability to harmonise market practice, legal around whether the Bank of England will
and fiscal arrangements across multiple commit settlement of GBP-denominated
European markets. If we are still confronted securities that are settled in Euroclear UK &
with market-specific requirements such as Ireland to the T2S platform. Florence Fontan
Dr Robert Barnes,
Stamp Duty Reserve Tax in the UK or regis- indicates that, as a user of the system, BNP Managing Director for Equities,
tration references in the Spanish market, for Paribas Securities Services would welcome UBS Investment Bank
example, this will compromise the potential the major scale benefits and opportunities
Some CSDs are still uncomfortable with the prospect of outsourcing settlement to T2S. But it is
important that this unease on the part of some CSDs does not obstruct the T2S project design
and implementation. Thus it is crucial in tabling the Framework Agreement that we retain clear
sight of general harmonisation principles that overarch the programme. CSDs must not be allowed to
obstruct the project by challenging small details within the Framework Agreement in order to avoid
the need to change their operating models or to decommission existing settlement platforms.
for a T2S platform to push down the price for mutualisation that this will deliver. This
of cross-border settlement in Europe to a said, she is confident that T2S will bring
level comparable to that for settlement of significant opportunities for mutualisation
domestic transactions. regardless of whether the UK decides to
join. “BNP Paribas Securities Services is a
Euroclear’s Jan Lemeire is confident that, CSD participant in multiple CSDs across
in the longer term, T2S may encourage Europe,” she explains. “This demands that
further market-practice harmonisation across we constantly update our internal opera-
Financial Services Research July 2010
markets in the post-trade environment and tions and technology to accommodate tech-
it may enable CSD participants to employ nical and procedural changes across each of
more efficient back office operations. Le- these CSDs.”
meire points out that Euroclear has already
played an active role in driving harmonisa- Consequently, she believes that the mutu-
tion of market practices, and fiscal and legal alisation delivered by T2S will bring major
arrangements in Belgium, France and the efficiency benefits, in terms of reduced
Netherlands in preparing for the launch of settlement costs and reduced cost of
ESES, and in other Euroclear group markets systems adaptation, regardless of whether
for the Single Platform. However, he recog- it embraces GBP-denominated (and other
nises a danger that some CSDs may wish to non-euro denominated) securities. “This
limit harmonisation in order to protect their position is substantially better than the
existing franchises, making it difficult for an existing status quo – the highly fragmented
48
investor CSD to offer a service that is as effi- environment that we are forced to work

10. TARGET2-Securities
in currently,” she asserts. “We note, for two categories. For the Bank of England,
example, that it has taken Euroclear group the Swiss National Bank and a number
almost 10 years to deliver the ESES project of central banks in the Nordic region, for
that centralises securities settlement for the example, the question is principally whether
Belgian, Dutch and French markets onto a or not they will bring their currency on
single platform. T2S will accelerate the rate board to support CeBM settlement in T2S.
at which we can realise efficiency benefits Other central banks (including central banks
– and we must strive to optimise these in Poland, Hungary, Romania and the Baltic
gains through pushing volume through the states among others) face the additional
platform and extending the range of instru- challenge that they are preparing for adop-
ments that it can support.” tion of the euro as their official currency
and, in parallel with this, they are reviewing
Currency Participation whether they will link to the T2S platform.
Agreement In light of this, the ECB expects to host two
Another major activity for 2010 is negotia- distinct sets of discussions with the central
tion of the Currency Participation Agreement banks that fall into these respective catego-
(CPA) with non-euro area central banks ries. “We are confident that preparatory
that anticipate allowing their currencies to discussions in each of these categories have
be settled in T2S. Jean-Michel Godeffroy, been progressing well,” says Godeffroy.
Chairman of the T2S Programme Board, Central banks are weighing up the implica-
observes that from early July the ECB will tions for the domestic and international
be in a position to firm up the contractual banking industry of seeing settlement of
arrangements that will underpin the CPA euro-denominated and non-euro securities
with non-euro central banks (see pp 36-7). in the T2S platform.
Pricing issues remain fundamental to the success or failure of T2S. ECB representatives have
indicated that T2S pricing might be €0.15 – €0.25 per transaction and have questioned whether a
€0.05 or €0.10 difference in the settlement cost will make a big difference to users of the system.
The answer is yes, the difference between a €0.15 fee and a €0.25 fee per transaction will matter
greatly to us.
Consultation with these central banks has Multi-market asset servicing
been ongoing for some time. “However, in T2S is likely to transform the way that many
preparing the project schedule we recog- global custodians and global broker-dealers
nised that negotiations around the Frame- do business – providing the foundation for a
work Agreement would require consider- less fragmented, more efficient market and
Financial Services Research July 2010
able time, given that the Eurosystem would providing a facility that will pool settlement
need to negotiate terms of the Framework liquidity across multiple European markets
Agreement with the CSDs and the CSDs under one roof. A primary consideration
would then require time to secure approval is that the launch of the T2S platform is
from their national regulators and to ensure likely to prompt a separation of transaction
they have the support of CSD participants,” settlement and asset servicing. Paul Bodart,
he says. “With this in mind, we were Head of EMEA Operations at The Bank of
eager to expedite work on the Framework New York Mellon explains that, at the cur-
Agreement and, when this was well on track, rent time, BNY Mellon typically processes its
to accelerate our work on the CPA.” transaction settlement and asset servicing
activity through the same provider in mar-
In preparing the Currency Participation kets in which it employs a sub-custodian.
Agreement, the ECB is negotiating with However, the launch of the T2S platform
49
non-euro central banks that fall broadly into will prompt the bank to re-evaluate its busi-

11. TARGET2-Securities
ness model. “We are likely to connect di- rently, UBS Investment Bank employs nine
rectly to T2S in order to manage transaction agent banks to service settlement with 27
settlement internally for euro-denominated CSDs across Europe. With T2S, UBS may
and selected non-euro securities that are look to reduce the number of agent banks
supported by the T2S platform,” he com- it employs down to two or three across
ments. “In some markets, we will continue these 27 markets, and agents will also have
to employ the services of a sub-custodian in opportunity to capture new business as
order to meet our requirement for corporate more countries enter the European Union or
actions processing, tax administration, proxy the T2S model expands world-wide.
voting services and other key asset servicing
functions. In other markets, we may elect to In the face of these developments, sub-
dispense with the services of a local agent custodians and CSDs will be forced to review
and to handle our asset servicing require- the range of services that they offer and
ments internally.” their opportunities for generating revenue.
Some level of consolidation in both of these
With these challenges in mind, BNY Mellon market segments is a likely outcome.
is conducting a detailed assessment of its
securities processing requirements across Indeed, with the release of a T2S platform,
European markets in order to identify how CSDs are being invited to outsource settle-
it can reap maximum benefit from the ment of euro-denominated (and potentially Jean-Michel Godeffroy,
Chairman of the T2S Programme
release of T2S. “This project will evaluate some non-euro denominated) securities to Board, European Central Bank
the ability of sub-custodians to meet our the T2S platform, along with some of the
processing requirements and at what cost,” data management responsibilities sitting
says Bodart. “On a market-by-market basis, around this function. This will leave CSDs
we will also review how we will structure principally with an asset servicing role,
these processing arrangements.” along with limited client service responsibili-
ties in supporting the settlement flow from
Dr Robert Barnes, Managing Director for CSD participants that is outsourced to the
Equities at UBS Investment Bank and Chief T2S platform. The ECB has proposed that
Executive of UBS MTF, proposes that T2S CSDs expand their role and cover pan-T2S
will serve as a catalyst to reduce post-trade securities rather than just their domestic
costs and harmonise process in European ones. However, Unicredit’s John Gubert
securities services. Now, he suggests, is points out that few CSDs have past experi-
the time for agent banks and CSDs to seize ence in delivering multi-market settlement
the opportunity to make the next stage of or asset servicing – and many CSDs (espe-
the business case to the user community. cially those that are outside the major ICSD
It is time for incumbents and new entrants groupings) will struggle to make the invest-
to volunteer proposals for lower fees and ments required to develop a credible service
improved market efficiency. Why does offering in this area. Moreover, CSDs are
this matter? Because lower fees increase being asked to position themselves in a
liquidity, minimise market impact and, space which overlaps only weakly with
Financial Services Research July 2010
ultimately, improve investment performance the needs of the global investor – many of
for issuers and end investors. And the will- whom are seeking a service intermediary
ingness of CSDs and agent banks to listen to support their cross-border investment
and respond to this request is evidence of activity worldwide, rather than a provider
their commitment to promote best prac- that can only support this activity across a
tice and is central to the growth of market limited number of European markets.
liquidity across Europe (see pp 62-3).
Some commentators have suggested that
Barnes believes that T2S offers potential CSDs might respond further to these chal-
to enable settlement providers to operate lenges by establishing themselves as banks.
across a pan European level, rather than But Gubert believes that in many cases this
just a national level, for those aspects of proposal is unrealistic. This demands that
the settlement process not constrained by CSDs raise additional capital to cover new
50
domestic legal and fiscal differences. Cur- commercial risks – and, in order to generate

12. TARGET2-Securities
a return on this capital, they may be forced Price dynamics
to take on higher risk commercial activities Network managers have raised the ques-
which may be incompatible with the tra- tion of whether T2S may deliver a zero-sum
ditional risk-profile of a CSD or the prefer- outcome in terms of sub-custodian pricing.
ences of CSD participants. Facing a decline in settlement-based rev-
enue in a T2S environment, sub-custodians
According to some estimates, certain may be forced to revise upwards what
European CSDs may lose 30-40 per cent of they charge for asset servicing functions.
their existing revenue stream when T2S goes Responding to this point, the ECB’s Jean-
live. Consequently, notes KAS BANK’s Henk Michel Godeffroy is confident that T2S
Brink, these organisations will be under will bring more than a zero-sum outcome
pressure to compensate for this loss of because it will deliver significant general
revenue – and, in response, they will explore benefit for the market in terms of pricing
opportunities to extend the range of value- and efficiency. “However, we recognise
added services that they offer to customers. that T2S will not benefit all stakeholders
For KAS BANK, this development does not equally,” he says. “Those that embrace T2S
come as a sudden surprise. “This move has as a business opportunity will gain competi-
been on the cards for a number of years and tive benefit when T2S goes live. However,
is one that CSDs and ICSDs have discussed we recognise that in the name of opera-
Ulf Noren, with their users,” he says. “In response, we tional efficiency and market harmonisation,
Global Head of Sub-Custody
Client Relations, GTS Banks, SEB recognise the need to sharpen our service inevitably some market participants will be
Merchant Banking offering and to continue to innovate in order better placed than others to commit the
to stand out from the crowd. Of course, this investment and expertise needed to thrive
is something we have been doing for more in this new environment.”
than 200 years, and is an area where we are
accustomed to adding genuine value. This BNY Mellon’s Paul Bodart expects pricing
said, as multi-market specialists in the asset to drop overall with the launch of T2S.
servicing space, we are also aware that it has But the early messages emanating service
taken many years of experience and invest- providers is that buyers should not expect
ment to build the high-quality value-added to see major reduction in overall supplier
services that we currently offer at KAS cost at current levels of processing ac-
BANK. In contrast, many CSDs presently lack tivity. Sub-custodians will need to invest to
this expertise and will not be in a position redesign their service capability for a T2S
to compete effectively in this asset servicing Europe – and, when the T2S platform goes
space when T2S goes live.” live, they will expect to be well remuner-
ated for servicing high-risk elements of the
To compete effectively in the asset servicing securities transaction lifecycle (for example
arena, CSDs must be able to handle the full in processing corporate actions) without
range of complex service provision that is the benefit of stable revenue flow coming
currently offered by leading multi-market from transaction settlement.
securities services providers in Europe. BNP
Financial Services Research July 2010
Paribas Securities Services’ Florence Fontan This said, BNY Mellon currently employs
believes it is questionable whether buyers 17 sub-custodians in Europe to support its
will appoint CSDs to meet their full asset cross-border activity in 27 markets. With
servicing requirements when these CSDs T2S, Bodart suggests that the bank may
have limited experience in this area and may consolidate its network support across
only be able to meet the rudimentary needs these 27 markets down to a smaller number
of the customer. With the launch of T2S, of sub-custodians. “In these circumstances
CSDs may want to compete in a demanding we would expect to realise scale discounts
commercial environment for value-added from these service providers owing to the
services and she predicts that some may additional volume of business that we will
struggle to develop a credible service of- bring to them across their pan-European
fering that can match the high standards on service offering,” he says.
offer from other specialist providers in the
51
market. Andreas Wolf confirms that Clearstream is

13. TARGET2-Securities
firmly committed to T2S. “We made this securities transactions. “At this stage, we
clear by being the first CSD to sign the still do not have sufficient information
Memorandum of Understanding with the around the detailed price schedule and
Eurosystem in July 2009,” he says. However, projected settlement volumes to provide
he believes that several questions need to an unequivocal answer to this question,”
be resolved before, as a CSD, Clearstream adds Wolf. “The T2S Advisory Group has
can take a decision to sign a legally-binding been informed that it will receive further
contract to outsource settlement activity to information on the pricing schedule to be
T2S. One is the detailed pricing schedule applied by T2S. However, as yet, this infor-
in euros that will apply to CSDs that enter mation has not been forthcoming as a price
into such an outsourcing agreement and list in euros. More generally, Clearstream
how this will be contingent on settlement has requested that it be represented ef-
volumes processed by the platform. Though fectively in the external governance of the
the Eurosystem has announced a price guar- T2S project, with effective input into the
antee for the first two years of T2S’ opera- change management process after the sig-
tion, Clearstream has pressed for this price nature of legally binding contracts. When
guarantee to be extended to ensure that these dual concerns have been addressed,
it does not carry volume risk in the early we are likely to be better placed to affirm
stages of T2S operation. In the absence of our final and legally binding commitment
this guarantee, CSDs may face a sharp rise to the project and to commit necessary
in the cost of outsourcing settlement to investment.”
Some users may elect to link to T2S directly via direct connectivity arrangements. However, we
question whether the potential benefits will warrant the cost and complexity of establishing a
direct technical link into T2S. For prestige reasons, some prominent players have indicated that they
may connect directly as soon as the T2S platform goes live. However, others may prefer to wait until
the project is bedded in and necessary refinements have been made to the platform.
T2S if the platform fails to attract a critical With the T2S platform in place, securities
volume of settlement activity. settlement in many European markets will
be heavily commoditised. Hence, CSDs
The Eurosystem has stated that T2S will will need to look for alternative revenue
reduce prices for cross-border settlement. sources further up the value chain, en-
However, Clearstream’s Wolf points out suring that they can service a range of
Financial Services Research July 2010
that a major share of transactions proc- markets as an investor CSD rather than
essed through CBF and many other Euro- simply focusing on their own domestic
pean CSDs are domestic – and, given the market as an issuer CSD. However, with 27
relatively low cost of domestic settlement, CSDs now having signed the Memorandum
many T2S players wonder whether T2S of Understanding with the Eurosystem,
will deliver significant overall cost savings. Euroclear’s Jan Lemeire feels it unrealistic
This very question has been raised in T2S that each of these CSDs will be able – and
consultation on several occasions, reflecting even allowed by their owners – to move
concerns of CSD participants that the up the value chain and to sustain a viable
design and operation of T2S will present business by competing for asset servicing
a sizeable overhead that Europe’s finan- revenues. Inevitably, some CSDs will be
cial services industry may be paying off better positioned than others to take this
for years to come – resulting for a time in step. “At Euroclear, we intend to leverage
52
higher, not lower, overall cost of processing T2S as fully as possible in order to be the

14. TARGET2-Securities
leading provider of post-trade services in and domestic institutional customers in
Europe,” he says. “Given that it is in the areas where T2S does not support their
plan of T2S to improve interoperability core requirements. The most notable areas
between European CSDs, its launch is ex- are in providing asset servicing exper-
pected to facilitate our strategic ambitions tise and information across multiple CEE
in this area.” markets. Unicredit plans, on its current
understanding of T2S, to offer customers
SEB’s Ulf Noren believes it likely that we three core options. It could offer a continu-
will see change in the services delivered by ation of the status quo. It could offer a hub
CSDs in a T2S world. Under the Securities solution into the CEE via Unicredit’s existing
Law Directive, CSDs may be authorised to Vienna hub. And, it could offer a solution
acquire a limited purpose banking licence for the asset servicing and other needs of
in order to deliver a specified range of customers that opt for a direct T2S inter-
banking services. From SEB’s viewpoint, face (see box pp 54).
The ECB assures us that there will be no further delays and that the new planning is robust, although
the market seems to have its doubts about this. With these considerations in mind, it may be
unrealistic to assume that markets across the eurozone will be harmonised to a level where we will
pay 90 per cent lower fees for all cross-border settlements. In addition to bearing the estimated
€250 million cost of developing the T2S platform, market participants will bear the cost of ongoing
harmonisation initiatives at market level.
this ‘limited purpose’ banking licence will From an SEB perspective, Ulf Noren pro-
enable a CSD to deliver many of the serv- poses a number of strategies that the bank
ices currently offered by a sub-custodian, could pursue in the face of these competi-
including securities lending and borrowing tive dynamics. “We could elect to continue
facilities and the provision of credit. By with our existing strategy, believing that
implication, this will have a major impact the relatively strong business expansion
on the competitive landscape for delivering that we have sustained in recent years will
securities services in Europe. serve the bank well in a post-T2S world,”
comments Noren. “But we recognise that
For users, the T2S project poses important T2S will substantially redesign the securi-
questions regarding how best to connect ties services landscape in Europe – and our
to the T2S platform. Some may elect to research suggests that a ‘continue as we
link directly via direct connectivity ar- are’ strategy is unlikely to be viable when
Financial Services Research July 2010
rangements. However, Unicredit External T2S goes live. Customers may conclude that
Advisor John Gubert questions whether the our unwillingness to adapt to a changing
potential benefits will warrant the cost and Europe is unlikely to serve them well in the
complexity of establishing a direct technical future.”
link into T2S. For prestige reasons, some
prominent players have indicated that they With the launch of T2S to provide central-
may connect directly as soon as the T2S ised settlement for euro-denominated and
platform goes live. However, others may some non-euro securities, SEB anticipates
prefer to wait until the project is bedded in that leading global custodians and broker-
and necessary refinements have been made dealers may seek remote access to the
to the platform. bank’s core markets, while still opting for
the support of a local agent to support
Gubert explains that, for Unicredit, the key corporate actions processing, tax services,
53
is to support the bank’s global custodian market information and other key asset

15. TARGET2-Securities
servicing requirements. With this in mind, Unicredit’s John Gubert recognises that,
SEB will position itself to support the global for market participants, the extended T2S
custodian and broker-dealer community as development period will have important
they make these strategic choices – facili- implications for strategic planning and
tating direct access to the local infrastruc- resource allocation. T2S will support mul-
ture and extending a complementary set of tiple instruments across multiple European
services that will dovetail with the service locations, some of which share harmonised
requirements that they meet internally (see market practice at the time of the project
box pp 56). launch; others will need to realign market
procedures as they link to the platform.
Strategic planning Thus, market participants will continue to
The Framework Agreement for T2S has bear significant harmonisation costs within
been delayed – owing, we are told by the markets, in addition to the direct overheads
ECB, to the success of the consultation associated with the T2S build and imple-
process around the project design and gov- mentation. Just as with Y2K implementa-
ernance framework. Given that it will be at tion, there is likely to be a period when
least four years before T2S is implemented, firms with plans for direct links to T2S will
FSR asked T2S stakeholders how this would be forced to place on hold work on all
affect their strategic planning for the inter- other development projects and to focus
mediate period. exclusively on T2S.
Getting connected
John Gubert, External Advisory, Unicredit Global Securities Services, explains to FSR
how Unicredit GSS will be positioning itself to service customer needs in a T2S Europe
For users, the T2S project poses its current understanding of T2S, to For Unicredit, the key across the
important questions regarding how offer customers three core options. CEE is the complexity of the region’s
best to link to the T2S platform. relationship with T2S. It will be a
Some may elect to connect directly “Firstly, we will offer the main- hybrid region, with three Euro mar-
via direct connectivity arrangements. tenance of the status quo,” says kets (Austria, Slovenia and Slovakia),
However, John Gubert questions Gubert. “Customers will have the several Euro candidate markets,
whether the potential benefits will option to continue their direct possible non Euro participants in
warrant the cost and complexity of relationship with all our locations; T2S and non T2S markets. As a
establishing a direct technical link we interface with T2S (most likely region, it will probably be in per-
into T2S. For prestige reasons, some through the local CSD) and thus manent transition to T2S through
prominent players have indicated insulate them, to the extent pos- to the end of the current decade
that they may connect directly as sible, from T2S changes. Secondly, whilst, at the same time, Unicredit
soon as the T2S platform goes live. we will offer our hub solution into anticipates material market change
Financial Services Research July 2010
However, others may prefer to wait the CEE, continuing with our existing at exchange, CCP, CSD and in-
until the project is bedded in and Vienna hub. We are looking at the strument levels. “Austria, as the
necessary refinements have been option of blending this with direct gateway to Central and Eastern
made to the platform. access to our different locations for Europe and the home location of
asset servicing, market information the Vienna Börse Group, will, in our
For Unicredit, the key is to support and local influence, although we still mind, be the gateway to a complex
the bank’s global custodian and do- have to gauge the appetite for such and changing environment for the
mestic institutional customers in areas a service. And, finally, should cus- whole CEE,” comments Gubert.
where T2S does not support their tomers opt for a direct T2S interface, “We believe firmly that Unicredit
core requirements. The most notable we plan to seek out a solution for is best placed, with its pan CEE
areas are in providing asset servicing their asset servicing and other needs, market presence and expertise, to
expertise and information across mul- although we are concerned at the manage this complex transition.
tiple CEE markets. Unicredit plans, on risks engendered by such a model.” And, we are committed to do so.”
54

16. TARGET2-Securities
However, Jan Lemeire indicates that had expected to commit to other develop-
Euroclear’s strategy is not dependent ment projects running during 2010-2014.
on the progress of T2S. In 2009, Euro- “The ECB assures us that there will be no
clear reassessed its project management further delays and that the new planning is
strategy in order to accommodate T2S robust, although the market seems to have
and to embrace other key initiatives that its doubts about this,” says Brink. “With
might impact its business planning. With these considerations in mind, it may be
this in mind, it has adopted a phased ap- unrealistic to assume that markets across
proach to Single Platform Custody, Single the eurozone will be harmonised to a level
Platform Collateral Management, Single where we will pay 90 per cent lower fees
Platform Transaction Management and to for all cross-border settlements. In addition
the Common Communications Interface to bearing the estimated €250 million cost
in order to eliminate any duplicate invest- of developing the T2S platform, market
ments with T2S and to accommodate any participants will bear the cost of ongoing
potential movement in the T2S design or harmonisation initiatives at market level.”
implementation timeframe.
Clearstream’s Andreas Wolf notes that the
More broadly, the global financial crisis has T2S project timeline has already slipped by
prompted Euroclear to review the Single 15 months. Though the project implemen-
Platform project’s design and how best to tation was originally tabled for mid-2013,
Though the Eurosystem has announced a price guarantee for the first two years of T2S’ operation,
we have pressed for this price guarantee to be extended to ensure that we do not carry volume
risk in the early stages of T2S operation. In the absence of this guarantee, CSDs may face a sharp
rise in the cost of outsourcing settlement to T2S if the platform fails to attract a critical volume of
settlement activity.
meet the changing needs of its customers. this has now moved to late 2014. Though
“Consequently, we have revised the launch it has not been confirmed publicly, some
sequence and broken down the remaining observers have suggested that CSDs may
elements of the project into modules,” have only a nine month window in which to
says Lemeire. “Single Platform Custody will test and verify their interface with the T2S
be implemented first and will continue to platform prior to supporting live settlement
bring harmonisation to the asset servicing through this system. This will follow a 15-
environment across all markets in which month internal testing period conducted
Euroclear is active. Thereafter, we will add by 4CB (the consortium of central banks of
Financial Services Research July 2010
a collateral management module, which France, Germany, Italy and Spain who are
Euroclear customers have indicated is crucial building and will be operating T2S) and the
to the SP project in the current economic Eurosystem project team in order to confirm
environment. It will enable them to access readiness of the platform. Commenting on
a wide pool of collateral across seven EU this testing schedule, Wolf points out that
markets supported by six Euroclear CSDs this is a short timeframe when “open heart
and Euroclear Bank.” surgery” is being conducted on the securi-
ties settlement system operating in leading
KAS BANK’s Henk Brink believes that the European markets. And this presents
one year delay already witnessed in the T2S sizeable risk to the smooth functioning of
project timeframe may result in additional leading European securities markets, should
costs for market participants, who may be technical difficulties or a platform failure
forced to reorganise their project sched- result within such a tight testing and imple-
55
ules and to reallocate resources that they mentation window.