26 April 2010

Interview with Adolfo Garcia, Head of Securities Forums, Banco Santander

Mr Adolfo García, Banco Santander has been involved in the T2S project from the beginning via the T2S Advisory Group (AG). You have thus seen how the governance structure has evolved with the project during the different project phases. As the project has entered into the development phase, preparations for the future operation of T2S have begun. How do you see the future governance of T2S once it is in operation?

Banco Santander has been involved in the T2S project since it was embryonic. I recall that it was a great satisfaction to host the November 2007 AG meeting at our headquarters in Madrid. Later, Banque et Caisse d’Épargne de l‘État de Luxembourg, HSBC and RBS followed and this year it will be the turn of ING Bank and Bank Austria. Indeed, banks have clearly shown their commitment to this project and users have provided their expertise and allocated extensive resources to it.

There is currently a voiced concern that banks may lose relevance in the future governance of the project, not only when T2S becomes operational, but even at an earlier stage, after the Framework Agreement is signed. Although it is clear that certain matters pertain intimately to the relationship between CSDs and the “public task” (which seems to be the new name for referring to this outsourcing), the CSD Contact Group (CCG) should have a clear mandate for properly identified issues only. Besides, users have a point when they raise the issue of fair representation at the CCG and I would suggest having between three and five users as observers in that group.

AG meetings should not become high-level informative sessions; it is important to secure the engagement of all of the various stakeholders

AG meetings should not become high-level informative sessions; it is important to secure the engagement of all of the various stakeholders in such a way that their opinions are taken into account. Users should provide input on all change requests that affect them and they should, therefore, be represented at the AG meeting on an equal footing with central banks and depositories.

With regard to the creation of a separate legal entity, the task force chaired by Marye Humphery presented an excellent report. It is understandable that the non-euro area central banks want to have a high level of decision-making and adequate control of their currencies. The final outcome, however, will be a political compromise between the euro and the non-euro area that takes into account the expectations of the market to achieve economies of scale and enlarge the geographical scope of T2S. The decision of the Governing Council is being awaited with interest: the CSDs want to know with whom they will be working and how this will affect governance in this Eurosystem-owned and operated project.

The most important and most direct benefit of T2S will be a significant reduction in cross-border settlement fees, which are still, on average, more than ten times higher than domestic fees. As a user, what are the other most attractive benefits you see in T2S?

A fee schedule is very much expected.

A fee schedule is very much expected. If the fees are low, the schedule will have a very positive impact on users and, in addition, it will attract other currencies to the project. Since the inception of T2S, this proposal has contributed to maintaing users’ interest in the project. Unfortunately, time is running quickly and we are still far from reaching a consensus on the level of the fees. This is a key point for us to set up our own projections and budgets.

What we do know so far is that it may not have the desired simple structure. Although the project is more complex and its current scope is more ambitious and less lean than was initially intended, too complex a fee structure would be a disappointment, regardless of the fact that, today, we already have to live with the complexity of local settlement fees applied by local central depositories. I think that an item on everybody’s agenda is the endeavour to strike a good balance between a simple fee schedule – with few additional items charged separately – and a complex one.

The focus placed on market practice harmonisation is one of the main promised benefits to be delivered by this project.

Apart from the fees issue, the focus placed on market practice harmonisation is one of the main promised benefits to be delivered by this project. I praise the work done by many colleagues, in particular Paul Bodart and Joël Mérère. This work is an ongoing exercise and there will be new grounds for advancement. I also welcome the set-up of a new task force on shareholder transparency, a discussion forum attended by the European Commission. Whether issuers find a home in T2S for solutions on shareholder visibility remains to be seen.

In January 2010 the Governing Council decided to freeze the User Requirements Document (URD) on the basis of the AG recommendation. This will provide a stable basis on which to develop the system. The “frozen” URD includes the Credit Memorandum Balance (CMB) functionality. The CMB will provide an enhanced service to payment and settlement banks for the management of their clients’ credit lines. How do you regard this additional feature in T2S?

The CMB functionality, in the end, will be perceived positively

The CMB functionality is not a service that we would have demanded or a must for all banks. However, I think that it will become a standard functionality and, in the end, it will be perceived positively. The debate rather hinges around the additional time needed for its implementation and its cost. Each time that a new initiative requiring development is put forward, concerns about possible delays in its implementation are aired. The fact that it will be priced separately has calmed the less enthusiastic participants.

During February and March 2010 the Spanish securities regulators ran a consultation on a possible reform of the securities clearing, settlement and registry system. The objective is to improve the efficiency of the Spanish system and its ability to participate, for instance, in T2S. What are your reflections on the proposed reform and how will it help the Spanish participants prepare for T2S?

At two informative sessions, in Frankfurt on 22 January 2008 and in Madrid on 21 April 2009, I praised the joint report issued by the Spanish authorities in December 2007 on the need for deep reforms in the Spanish post-trade market in order to adapt it to MiFID and T2S. I also expressed the urge to start working on them swiftly. Some time has elapsed, but at last the complex exercise has started and it is moving in the right direction. The sooner these reforms are finalised and implemented, the more easily users in Spain can prepare for the launch of T2S.

The document submitted for consultation earlier this year echoes the fact that specific national features can only survive in a T2S environment if they are efficient and compatible from an operational point of view.

In a cross-border environment, the reform of the Spanish post-trading system on equities is not only of interest to and for the benefit of Spanish participants, but it is relevant for all.

In fact, the demand for this reform has been fostered just as much by non-Spanish participants. It should also be borne in mind that the Spanish central depository is made up of participants from a variety of countries. The reform is analysing the possibility of setting up a CCP system for securities trades and the possible shift of finality from trading to settlement time.

Most relevant for T2S is the reform of the Spanish ownership tracking references (RRs). It will hopefully mean that directly connected users will not need to provide RRs before the settlement process. However, RRs will still be maintained or perhaps changed into a similar system capable of efficiently tracking ownership. Whatever the outcome, it will certainly be T2S friendly.