A single platform for securities settlement in Europe and the continued growth of e-commerce will soon out-date the market infrastructures as they exist. Frances Faulds looks at how market infrastructures are reinventing themselves and redesigning their services to remain relevant. 

It may seem as if little is changing year on year, but behind the scenes of ‘business as usual’ financial market infrastructure providers are working flat out to reinvent themselves, redesign their services and redefine their value-proposition.

Described as being akin to splitting the atom, Target2-Securities (T2S) will take settlement of securities within the Target2 currencies away from the central securities depositories (CSDs) and, while levelling the playing field and harmonising securities settlement across Europe, this will also commoditise securities settlement.

T2S will at once out-date today’s securities settlement infrastructure, as well as blur the lines that exist between services. As industry players diversify and take on new roles, such as providing liquidity management services, payments industry players and national central banks are considering leveraging T2S beyond payments.

Custodians are entering the CSD space, while CSDs are thinking about offering more custody services, and central counterparties (CCPs) are assessing how to take advantage of the changing landscape. At Sibos 2013, which is being held in Dubai between September 16 and 19, delegates will explore how these trends increase the pressure on the traditional market infrastructures, as their former clients become new service providers in a landscape that is undergoing major restructuring.

Legislative tsunami

Paul Symons, head of public affairs at settlements system provider Euroclear, says that while the post-trade area tends to move slowly from a policy perspective, in many ways this is the calm before the storm, with testing and migration to T2S about to commence, the finalisation of the European Commission’s Central Securities Depository Regulation (CSDR) coming, and the resolution and recovery regime for which CSDs are just beginning to plan.

“There is an enormous wave of issues that are beginning to hit the CSDs. The post-trade industry, at CSD level, is the tail-end of the post-crisis legislative tsunami,” he says.

Mr Symons adds that the objective of making the settlement and payments arena more competitive is underpinning most of these upcoming changes. Similar to the code of conduct in 2006, T2S and the CSDR are about opening up choice in post-trade. Competition will increase for both asset servicing and securities issuance services. As a result, Mr Symons says that Euroclear is positioning itself to create a single access point to T2S, supported by an easily accessible pool of collateral, which can be sourced and mobilised easily and effectively. In response to the need for greater collateralisation and margining as more business is put through central counterparties, Euroclear has created its global ‘collateral highway’.

“This is how we are reacting to the pressure to create products and services which assist the market in meeting the collateral demands it is facing in its day-to-day banking and securities business," says Mr Symons.

In addition, the market infrastructures in Europe are gearing up to provide a single access point for their clients to all T2S securities. “To this end, Euroclear is offering its clients a wide range of options to access T2S to enable them to take advantage of the new competitive environment that T2S will create at their own pace, and according to their individual business models,” says Mr Symons.

Revamping the market

The commoditisation of securities settlement brought about by T2S will have a lasting impact on the market infrastructures. They will have to revamp their services, especially as the upcoming CSDR will allow issuers to choose any CSD within the EU into which to issue their securities, under their national law. 

In preparing for this more competitive environment, Mr Symons says that Euroclear has unbundled its services to enable clients to choose which services they want and at what service level from different entities of the group. He says: “For the first time, we will support CSD clients with services for all T2S-eligible securities, similar to the services offered by Euroclear Bank. Our four CSDs that will connect to T2S will provide highly efficient asset servicing for the full range of T2S securities to their clients.”

Meanwhile, progress is already being made by the market infrastructures to improve post-trade efficiency. Euroclear’s collateral highway has attracted partnerships with BNP Paribas, Citibank and Standard Chartered, and it is working on a partnership with the Depository Trust and Clearing Corporation to extend the collateral highway to North America, alongside its continuing Asian partnerships.

Another example of the headway already being made is a recent partnership between Euroclear and BlackRock that will change the way exchange-traded funds (ETFs) are issued and structured in Europe, in a bid to smooth the cross-border delivery of multi-listed domestic exchange-traded funds by creating ETFs as international securities. The shift from multiple domestic CSD settlement to the International Central Securities Depository solves ETF cross-border settlement issues in Europe, creating more freely traded and more liquid instruments.

Simpler approach

For Mathias Papenfuß, chief operating officer and member of Clearstream's executive board, the two major changes, CSDR and T2S, are set to unify and create a level playing field in Europe. Mr Papenfuß, who will be speaking on a panel at Sibos about regulatory issues and the potential of increased concentration risk, believes that, more than any new regulation, the impact of a single settlement system for Europe will be significant and far-reaching.

He adds that T2S will dramatically lower the current level of cross-border complexity needed to link the CSDs, to more effectively move securities around Europe. “Clearstream is very much in favour of initiatives such as T2S because they can enable more harmonised European post-trading settlement, which is good for competition and good for the customer," says Mr Papenfuß. "T2S, for example, will help us offer collateral management services more efficiently. CSDR will also help create a level playing field in the provision of CSD services in Europe as well as harmonising securities settlement practices in Europe and the market will definitely benefit from this.”

While Germany is already operating on a T+2 settlement cycle (ie. transaction date plus two days), Mr Papenfuß says that harmonisation is becoming much more effective and much more tangible due to the regulatory pressure and infrastructure projects, citing T2S as a driver for other markets to now also move to the T+2 settlement cycle. He says: “T2S is effectively driving harmonisation and the implementation thereof, across the different European markets. It is both an incentive and an accelerator for harmonisation. Those that are open to harmonising market practices, the functional and technical procedures, will be the winners in this new domain.”

Opening up opportunities

There are multiple implementation dates according to the migration wave of T2S between June 2013 and November 2016, and although there is still no official end date for the implementation of T2S, Mr Papenfuß believes moves towards T2S are being made all the time, market by market. “Each time a market moves onto the T+2 platform it makes sense to combine it with the harmonisation of the settlement cycle.” he says. Adaption work is ongoing as and when the new procedures are defined.

Utilising the future European landscape and the changing value proposition is opening up opportunities to offer a range of new products and services. Single settlement in Europe is enabling Clearstream to further develop and market its collateral management services in order to enable customers to allocate collateral as efficiently as possible across Europe and beyond, as well as offering a single gateway into Europe for settlement.

According to Mr Papenfuß, the value proposition that Clearstream is looking at is not just of benefit from a settlement point of view but from the point of view of collateral. “Securities as collateral are coming under much more pressure and are in demand, so having effective mechanisms available to allocate collateral to different exposures within Europe and across the globe are of the utmost importance. This is available in Clearstream today and will be more attractive under the T2S umbrella,” he says.

As well as providing an opportunity for the CSD to extend its collateral services, Mr Papenfuß says that the emerging infrastructure will allow Clearstream to be a gateway to the European settlement platform. “Our German CSD will account for 40% of the future settlement volumes, based on today’s numbers. So we believe Clearstream will become a natural entry point to T2S.”

Wave of innovation

Strides are also being made in linkages and interoperability ahead of T2S. In July, the International Capital Market Association European Repo Council signed a memorandum of understanding with Clearstream, Euroclear and central counterparty Eurex Clearing, which engages the three post-trade infrastructure providers in a joint project enabling their systems to work together to increase the efficiency of the repo market. The project primarily creates an opportunity for Eurex Clearing to extend the connected settlement locations for its secured funding market GC Pooling with Clearstream banking to include Euroclear Bank. Pending completion of detailed feasibility studies and market consultation, tri-party settlement interoperability is envisaged to be delivered by the end of 2015.

Payments systems will also be caught up in this new wave of innovation as the market infrastructures rebuild from the ground up. David Yates, CEO of payment systems company VocaLink, who will take part in the closing debate on reinventing market infrastructures at Sibos, says that while the UK’s three payment infrastructures – Bacs, Faster Payments and Link – are stable and established platforms, in order to move forward VocaLink is working on making the bank account properly accessible, in a way it has not been in the past.

The fast-growing use of e-commerce has outpaced payments systems that were designed for cards. With card-based e-commerce transactions, there are a raft of security issues that much of the innovation in the payments industry has been spent on trying to solve. New propositions, such as VocaLink’s recently formed company Zapp – a payments ecosystem that links a customer’s mobile to their existing bank account – will bring payments up to date.

“Cards were never designed for e- or m-commerce. Simply put, Zapp is about giving people direct access to their bank account to make instant payments. It is a big innovation,” says Mr Yates.

The payments industry, more than any other, has seen the banks playing catch-up with new companies. Mr Yates says that up until now the market infrastructure that VocaLink is responsible for has been run in a way that is a cost to the banks and free to the consumer. “Because this is a cost-plus infrastructure, in the past it perhaps has not been as innovative as some of the newer entrants to the market. We need to encourage innovation through investment in a more profitable market infrastructure – a significant move away from the infrastructure today.”

Design decisions

While the market infrastructures are duty-bound to re-use what is already in place, Mr Yates believes the incoming data standard, ISO 20022, will enable a greater amount of information to be captured within the transactions that flow through the payments system. This could improve income tax and VAT reporting, social security distribution and tax credits, to really enable government and financial services to have all the data they need for operations to work efficiently, for both businesses and consumers.

But for Mr Yates, VocaLink will remain first and foremost a market utility rather than a commercially driven service provider. He says: “We need to remain as a market infrastructure provider but see ourselves developing new commercial businesses alongside our core market infrastructures to deliver proper new functionality that adds value to businesses and government.

“The card, and the physical point-of-sale device, is not the way this market is going to go but they are well entrenched. We need to be able to accommodate them but over time we need different structures, instant settlement and payment tools that are put directly in the hands of the customer.”

It is clear that redesigning the industry’s deeply entrenched market infrastructures is going to take time, and could come at more than just a financial cost. When Sibos delegates gather in Dubai later this month, they will discuss some of the potential unintended consequences of recent regulatory initiatives and ask whether the cost of regulation promotes concentration risk.

The session will examine whether regulation has negative impacts on market competition as bigger players might be better placed to comply with the new requirements and absorb the related costs, while smaller players might be pushed out of the market, giving rise to the risk of developing ‘too big to fail’ market infrastructures, presumably the exact opposite of what regulations were set to address.

Further still, the need to redesign the securities and payments market infrastructures has come at a time when there is a greater focus than ever before on cost, fulfilling regulatory demands and requirements around liquidity, collateral and risk controls, putting even more pressure on the industry to get it right and future-proof the new design.


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