T2S: A quiet revolution in European post-trading

Jean-Michel Godeffroy, chairman of the T2S Programme Board

I am very happy to introduce the first issue of our T2S OnLine quarterly review.T2S OnLine will bring you up to date on the project and demonstrate that T2S is “on line”. As a rule, as is indicated by its name, the newsletter will only be available online, on the T2S website. For SIBOS, however, we have decided to make an exception and publish a printed version as well.

T2S is now well known among securities specialists in Europe. But, as SIBOS is being held in Hong Kong, it might be useful for me to say a few words on what it actually is. T2S was conceived on 6 July 2006, when the ECB announced that the Eurosystem (the ECB and the national central banks of the euro area) was ready to provide settlement services for securities transactions in central bank money, which would lead to the settlement of both securities and cash on a single platform through common procedures.

Right from the start, T2S was seen to be revolutionary. It was based on an entirely new concept: a proposal for private-sector central securities depositories (CSDs) to outsource the running of their clients’ securities accounts to a technical platform run by the Eurosystem. Thus far, some central banks had agreed to outsource the management of their clients’ cash accounts to CSDs in order to allow for an efficient delivery versus payment (DvP) in a single technical platform (according to the “integrated model”). T2S will reverse this, namely to insource securities accounts to the central banks.

The flexibility of this technical solution gives the T2S revolution its European dimension. The continent has long been burdened with too many settlement platforms, preventing the market from reaping the full benefits of economies of scale.With the T2S model, only one single platform will be needed and all securities transactions will be treated as “domestic”, regardless of the location of the CSD, issuer or investor. Recent studies have shown that the cost of a cross-border transaction for equities in Europe is, on average, close to € 3.T2S will bring this cost down to about 15 cent!

Of course, like any revolution, T2S raises not only hopes, but also fears.

Of course, like any revolution, T2S raises not only hopes, but also fears. For example, in some countries, market participants with limited cross-border activities fear that domestic fees will rise. Let me be clear: the aim of T2S is not only to substantially reduce average settlement costs in Europe, but also to lower settlement costs for each and every market participant in Europe. I would like to invite those who feel that they would be worse off with T2S to look at their total costs, including fixed fees, telecommunication fees, inquiry fees, etc.And, if thereafter, they still believe that T2S does not offer them any benefits, I would invite them to write to me directly.

On the whole, however, enthusiasm remains high and fears are fading away. This was particularly apparent on 16 July of this year with the signing of a Memorandum of Understanding between the Eurosystem and 27 CSDs from 25 countries, a move fully supported by market participants. Looking back at the start of the revolution on 6 July 2006, I think there are two additional features of T2S that have perhaps not yet been fully addressed. The first relates to the multi-currency component of T2S. Originally, the idea was for T2S to be restricted to the euro, on the cash side, and to euro area securities.The Ecofin Council explicitly asked us not to limit ourselves to the euro area.The large number of CSDs that have signed the Memorandum of Understanding shows that interest goes beyond the euro area on the securities side. On the currency side, three non-euro area national central banks have already expressed their interest and I am aware that other central banks are also seriously considering the possibility of bringing their currency into T2S.

On the whole, however, enthusiasm remains high and fears are fading away.

In the end,T2S may be able to settle almost all securities in Europe, in several – if not all – of the most traded currencies in our part of the world. Furthermore, the choice of currency will not be restricted, unlike the situation today, where one CSD typically organises DvP settlement with one central bank. The securities in T2S could be settled against any of the currencies in T2S.T2S is geared to DvP and Europe, just as CLS is geared to PvP and the world. But the two concepts are indeed closer than I had previously thought.

A second element of this revolution concerns the role of central banks in securities settlement. For the last 20 years, central banks have moved away from securities settlement, shifting their CSD activity for government securities to the private sector.

With T2S, central banks have come back into the picture with a new focus, settlement in central bank money. This is the commoditised element, where competition achieves very little and economies of scale matter most. It is also the aspect that is most relevant for financial stability, something that is all the more important these days! Here again, I cannot avoid making a comparison with what happened in the field of payments 20 years ago, when central banks progressively re-invested in the payment processing field through the generalisation of the RTGS systems.This was done for reasons of both efficiency and financial stability. Even if the T2S concept is deeply rooted in the European context, it could be followed by similar initiatives elsewhere. In the end,T2S might turn out to be an even bigger revolution than we first thought!

T2S is a quiet revolution, without any obligation, and with the public and private sectors working hand in hand.

At the same time, T2S is a quiet revolution, without any obligation, and with the public and private sectors working hand in hand. This is due to the Eurosystem’s strategic choice in favour of both transparency and working in close association with the private sector through the T2S Advisory Group.

This emphasis on transparency leads me on to the first article in this inaugural issue of T2S OnLine. Helmut Wacket, Head of the ESM Section, gives us a round-up of the latest progress on the T2S project. In the Insight section, we also have a specialist article written by Petra Senkovic,who is currently putting together the legal framework for the next phase of the T2S project.T2S Programme Manager, Marc Bayle, gives us his view on how the Eurosystem’s T2S development team has been further strengthened over the summer. Finally, we will introduce the members of the T2S Programme Board.

We hope you enjoy reading T2S OnLine!