The framework agreement

One of the cornerstones of the T2S legal architecture – the Framework Agreement – will be put in place in the next few months. Given its significance, it will be a crucial challenge for all stakeholders to get it right.

The Framework Agreement will formalise and regulate the relationship between the Eurosystem and the central securities depositories (CSDs). It will cover not only the development phase, but also, and more importantly, the T2S operational phase. It will have the effect of binding the Eurosystem and the CSDs closely together, which is essential for both parties in order to plan future work and make the necessary investment.

The Framework Agreement will formalise and regulate the relationship between the Eurosystem and the central securities depositories (CSDs).

The main part of the Agreement will detail the rights and obligations of the Eurosystem and the CSDs, but the Agreement will also include a number of annexes describing the key operational aspects of the Agreement in more detail.

While the Agreement is being negotiated, it will, of course, be very important to ensure that the interests of the users are also taken into account. Although they will not be signing the Framework Agreement, they are ultimately the ones who will use and pay for T2S services.

The most critical topics to be tackled are also likely to be the most challenging for the negotiation process. We will need to balance the sometimes conflicting or diverging interests of the various parties.

It will, of course, be very important to ensure that the interests of the users are also taken into account

One of these critical topics is the platform’s governance and, in particular, the rules and procedures for change management. There needs to be an agreement on how changes to the T2S platform will be proposed, analysed, approved and implemented, and, in particular, what the involvement of the euro and non-euro area central banks, CSDs and users will be in this process.

Other important issues are the nature of outsourcing and the CSDs’ controlling rights, ensuring regulatory compliance, the various parties’ obligations during the development, testing and operational phases, as well as the rules on liability and arbitration, and termination clauses.

We should also not forget the issue of pricing, which I discussed in the last issue of T2S OnLine [ADD LINK]. Needless to say, T2S will offer extremely competitive settlement services, with a simple and transparent tariff list, which will provide CSDs with some assurance about what they will be charged in the first few years that T2S is in operation.

As you can see, we have an interesting time ahead of us. The Agreement is to be prepared with the CSD Contact Group (CCG), composed of the CEOs of the CSDs that have signed the T2S Memorandum of Understanding, together with the T2S Programme Board. In addition, the CCG will be supported by two subgroups: the Project Managers’ Subgroup (PMSG), for business and policy issues, and the Taskforce on Contractual Issues (TCI), which will be responsible for legal issues.

Our objective is to have the Framework Agreement ready in spring 2010. It will then be sent to securities regulators in order to receive confirmation that the CSDs which sign the Agreement will be complying with the relevant regulatory requirements. The Agreement would then be approved by the Governing Council in summer 2010.

The signing of the Framework Agreement will be a historic moment in the T2S programme.

Of course, given the short timeframe, some of the more technical annexes will not yet be in their final form, but will instead be at the level of “high level principles” or “general rules”. To complete these annexes will require detailed technical investigations that will need to take place over the next few years, rather than months. This will be the case for the annexes to the Service Level Agreement and to the migration and testing strategies, for example.

We therefore need to strive towards an acceptable level of detail in the Framework Agreement, i.e. a level which provides sufficient reassurance to CSDs that important requirements will be met in good time, but, at the same time, one that can be delivered quickly enough for a legal agreement to be signed later this year. Postponing the signing of the Framework Agreement until all annexes are complete would not provide the legal certainty that is required for planning and making long-term investment.

The signing of the Framework Agreement will be a historic moment in the T2S programme. But it will not be as simple as a “big bang” approach, as might be assumed. Instead, it will be more of a gradual process, with the details filled in and agreed over time. We will keep you updated on further progress in the next issue of T2S OnLine.