29 July 2010

T2S governance: finding the right path

Jean-Michel Godeffroy, chairman of the T2S Programme Board

If it were possible to compare the successful completion of the T2S programme to climbing a mountain, then coming up with a mutually satisfactory governance framework can sometimes feel as if you are traversing a rather sharp ridge. You need to tread very carefully, be creative in finding good footholds, and not go too close to the edge. Making sure that you feel comfortable and safe is important, but you also need to think about the well-being of your fellow mountaineers. You want to make sure that everybody reaches the crest, so you have to hold on tight to the rope. If just one person falls, you could be dragged down with them.

A lot of progress has now been made and, although it has sometimes seemed as if the path ahead is shrouded in mist, it appears that the T2S “compass” (the set of governance guiding principles) has kept us on the right track.

The future governance framework was always going to be one of the most difficult topics in the negotiations on T2S. Over the past 12 months, intense discussions have taken place with the relevant stakeholder groups. All the parties – the Eurosystem, the non-euro area central banks, the central securities depositories (CSDs) and market participants – have their “red lines” that cannot be crossed and must be respected by the other parties. Nevertheless, on most aspects of the debate there has usually been some room for manoeuvre to reach an agreement that is acceptable to all sides. A lot of progress has now been made and, although it has sometimes seemed as if the path ahead is shrouded in mist, it appears that the T2S “compass” (the set of governance guiding principles) has kept us on the right track.

The current proposal tries to address the concerns of all parties involved.

CSDs: The CSDs are currently negotiating their rights and obligations in T2S in the context of the Framework Agreement. A first draft of the Framework Agreement is ready, but so far it has not yet been possible to reach full consensus on governance. It is necessary to reconcile the CSDs’ demand to retain control over their securities accounts with the role of the Eurosystem, which is not only the owner and operator of T2S, but is also and primarily a public authority pursuing monetary policy and financial stability objectives.

In terms of the acronym “DvP”, the CSDs demand exclusive control over the “D”, the Eurosystem demands exclusive control over the “P” and also needs to maintain control over the “v”. The non-euro area central banks need to retain full control over their currencies, i.e. the “P”, but like the Eurosystem, they would also prefer some say over the “v”.

In terms of the acronym “DvP” (delivery-versus-payment), one can summarise the debate as follows: the CSDs demand exclusive control over the “D”, the Eurosystem demands exclusive control over the “P” and, because of the public nature of the task of providing T2S and the implications for monetary policy and financial stability, the Eurosystem also needs to maintain control over the “v”. Ultimately, the debate between the CSDs and the Eurosystem is what this control over the “v” means in practice and how far it affects CSDs’ control over the “D”.

According to the current draft of the future governance framework, CSDs will make proposals and discuss T2S issues within the CSD Steering Group (which will succeed the current CSD Contact Group). The Steering Group will then adopt resolutions on behalf of all participating CSDs and will be entitled to address the T2S Programme Board and the Governing Council of the ECB. However, the precise terms and conditions remain to be defined in the Framework Agreement.

Market participants: End users were initially worried about the establishment of an exclusive forum for discussions between the Eurosystem and CSDs, because they feared that decisions might be taken bilaterally without their being sufficiently involved. This concern has been overcome, and the Eurosystem has shown that decisions are and will continue to be made in a fully transparent manner and that consensus will be sought to the largest possible extent. In addition, user representative(s) will be allowed to attend the CSD Steering Group meetings with observer status. Given its success so far, there was general agreement that the T2S Advisory Group should continue to play a key role in the future governance arrangement. Despite being a large and heterogeneous group, the Advisory Group has worked extremely well, ensuring that all members of the T2S community are given a say in how the platform is developed and operated. This will also be the case under the future T2S governance, whereby the Advisory Group will be involved in all relevant decisions on the provision and development of the T2S service.

Given its success so far in the project, there was general agreement that the T2S Advisory Group should continue to play a key role in the future governance arrangement.

Non-euro area central banks: In some respects, the concerns of non-euro area central banks that may be outsourcing their currencies to T2S are similar to those of the CSDs, but go even further. It is imperative that they retain full control over their currencies, i.e. the “P” in DvP, but like the Eurosystem, they would also prefer some say over the “v”. As mentioned in the editorial of the last issue of T2S OnLine, one solution would be to create a separate legal entity for the governance of T2S and to include both euro and non-euro central banks on its managing board. However, this proposal is no longer being pursued as there was limited market support and alternative arrangements were deemed to achieve the same objective at a lower cost.

The latest proposal envisages the creation of two new governance bodies offering non-euro central banks far-reaching rights in T2S: the Foreign Currency Steering Group for the regular involvement of non-euro central banks in the T2S governance; and a special Arbitration Panel at the level of central bank governors to resolve potential high-level disagreements between the Eurosystem and one or several non-euro central banks.

The transparent decision-making process involving all relevant stakeholders has been crucial to the development of T2S in a consensual way to date, and the Eurosystem is strongly committed to pursuing this approach.

Ultimately, what is important is that the focus of the governance arrangement is on the continuation of the transparent decision-making process involving all relevant stakeholders. This process has been crucial to the development of T2S in a consensual way to date, and the Eurosystem is strongly committed to pursuing this approach.

The Governing Council has taken note of the current proposal, which will be sent to securities regulators as part of the regulatory review of the Framework Agreement. However, nothing is set in stone yet. The discussions with CSDs and non-euro area central banks on specific details will continue over the summer and autumn, and a final agreement is expected by the end of the year.

We are now on the very final stretch to the peak, and, even though you may not consider winter to be the most suitable season to reach the top of a mountain, I am sure we will arrive safely so that we may continue our journey in a well-organised and well-structured fashion.

Returning to my initial metaphor, I think we are about to safely traverse the most challenging ridge. Our safety rope has ensured that everybody is still on board, and the experience of achieving this challenge has brought us closer together and allowed us to better understand each other’s fears. We are now on the final stretch to the peak and, even though you may not consider winter to be the most suitable season to reach the top of a mountain, I am sure we will all arrive safely so that we may continue our journey in a well-organised and well-structured fashion.

I would now like to introduce the other articles in this issue. As usual, first Helmut Wacket provides a status update. This is followed by an article by Mehdi Manaa, who is in charge of T2S product management, on the General Functional Specifications, the latest version of which was approved ahead of schedule by the T2S Programme Board in May 2010. Next, there is a double interview with Göran Fors and Henry Raschen, Chairs of the National User Groups in Sweden and the United Kingdom respectively, with a focus on issues relating to participation of non-euro area markets in T2S. Marc Bayle, T2S Programme Manager, then gives a forward-looking view on the future selection of T2S network providers. Finally, in continuation of our series introducing the various members of the T2S community, we would like to present the CSD Contact Group.

I hope you enjoy this issue of T2S OnLine and I would like to wish you a very nice and relaxing summer break.