29 July 2010

Interview with Göran Fors and Henry Raschen

Mr Fors and Mr Raschen, as Chairs of the T2S National User Groups of Sweden and the United Kingdom respectively, you have witnessed the debate among your financial communities on the T2S initiative from the very start. What is the general stance of the Swedish and UK markets towards T2S?

Göran Fors: T2S is an interesting initiative by the Eurosystem. The purpose of T2S is to reduce the cost of cross-border settlement of securities transactions on European markets down to the cost of domestic settlement, for those markets that decide to join T2S. The Swedish National User Group (SWENUG) has announced that it does not rule out the possibility of joining T2S in future, provided that the cost of using T2S and the governance of the project are acceptable to the Swedish CSD and its users.

The Nordic markets have a very specific structure for end-investor accounts, which they would like to maintain, and a lot of work is being done to evaluate the various alternatives for efficiently setting up these accounts in the T2S context.

The SWENUG has asked Sveriges Riksbank to make the Swedish krona available in T2S. At this stage, however, the SWENUG is not prepared to accept eligibility criterion number 5 [according to which “a CSD in T2S commits towards other CSDs in T2S to carry out its Central Bank Money settlement in T2S if the currency is available in T2S”]. The Nordic markets have a very specific structure for end-investor accounts, which they would like to maintain, and a lot of work is being done to evaluate the various alternatives for efficiently setting up these accounts in the T2S context. In order to be able to participate in T2S, the SWENUG is considering asking the Governing Council for a derogation from eligibility criterion 5. A final stance on this issue will be taken once the analysis is completed and all implications have been clarified.

Henry Raschen: The UK market does not take a single view towards T2S, but clearly all participants are interested in any plan to bring about savings in the unit cost of settlements if these can be achieved without increasing risk. I understand that around half of securities trades denominated in euro are carried out in London. Many participants in the United Kingdom have remarked to me that T2S is likely to reduce the cost of cross-border settlement in Europe through economies of scale and may also assist in harmonising European post-trade activity. Conversely, there is concern that the cost of domestic settlement could rise under T2S, especially if T2S settlement fees do not replace existing CSD fees but are merely added to them.

For international business, the UK investment banks are generally in favour of sterling being in T2S. By contrast, London participants with the most domestic business tend to have the greatest concerns.

As a global financial centre, London has to be considered in terms of its international and its domestic business. For international business, the investment banks are generally in favour of sterling being in T2S in the expectation of simplified securities trading in Europe. By contrast, London participants with the most domestic business tend to have the greatest concerns about potential cost increases. Registrars and transfer agents wish to confirm how current features of the UK market would operate under T2S. Any future participation of sterling in T2S is subject to approval by the Bank of England, but first the users must be confident of the commercial benefits.

One of the key topics under discussion at this stage of the project is the participation of non-euro currencies in T2S. Three Scandinavian countries have signalled their interest in settling securities transactions denominated in their national currencies in T2S, and a number of other countries, including the United Kingdom, are still considering whether to do so. What would be the main benefits of T2S for the Swedish and UK markets? And what would, in your view, be the drawbacks in the event that your currencies are not settled in T2S?

One very obvious advantage is the possibility to be part of a wider European market infrastructure which I believe will be very important for the future.

Göran Fors: One very obvious advantage is the possibility to be part of a wider European market infrastructure which I believe will be very important for the future. Naturally, this has to be done taking into account the set-up of end-investor accounts as well as the very efficient market structure that is already in place today. One further benefit of joining T2S could be the lower cost of cross-border settlement, provided that the cost of using T2S makes it possible for the CSDs to reduce their tariffs (CSD cost + T2S cost).

If the Swedish market decides not to join T2S, it would mean that our domestic market has a better set-up, including for cross-border securities settlement, than that offered by T2S.

Henry Raschen: The advantages to be gained by the United Kingdom from sterling joining T2S would probably be lower cost cross-border settlement, improved harmonisation of securities processing, and a significant leap in dismantling the Giovannini barriers. As progress continues towards the European single market and the consolidation of market infrastructure institutions, settlement systems that remain outside T2S many years hence may find themselves isolated from some international capital flows. However, as the banking crisis and fiscal worries take time to resolve themselves, some participants do not wish to alter a system that works, even if the current structure is not completely efficient.

The Eurosystem is about to finalise the future governance of T2S. What elements are particularly important in view of the inclusion of non-euro currencies in T2S?

Since non-euro area central banks are not members of the Governing Council of the ECB, their legitimate interest to maintain control over their national currency needs to be catered for in some way.

Göran Fors: There are three important stakeholders in the Swedish market. These are the national central bank, the CSD and the users (banks and brokers). National central banks need to have sufficient influence over their national currency if they decide to outsource cash settlement of securities transactions to T2S. Since non-euro area central banks are not members of the Governing Council of the ECB, their legitimate interest to maintain control over their national currency needs to be catered for in some way. The national CSDs need to have control over the securities accounts that they have outsourced to T2S. The CSDs also need to maintain control over the development of new services and the improvement of existing services to their customers when T2S is up and running. Finally, the Eurosystem needs to show how the wishes and expectations of the users (banks and brokers), both from smaller markets and from non-euro markets, will be catered for in the governance structure of T2S. So far, it is not sufficiently clear how these markets could make their voices heard once T2S is in operation.

Henry Raschen: The current governance debate has two main components: the interaction between non-euro area central banks and the Eurosystem, and the interaction between users and CSDs in T2S.

For non-euro area central banks, there have been concerns that operating T2S within the existing Eurosystem governance structure would not represent a level playing field, and would give an advantage to Eurosystem members. The suggested alternative of a T2S separate legal entity is perceived by many in the United Kingdom as more likely to enable equality of access and control, but this would bring its own technical difficulties. UK participants are looking further at the options within the existing Eurosystem governance structure.

The continuation of an effective tri-party Advisory Group will be a major component in preserving users’ influence in T2S.

Users are keen to preserve their influence within the T2S governance structure, especially through the continuation of the T2S Advisory Group. The Advisory Group has been a very effective forum for the exchange and resolution of views amongst CSDs, users and central banks since 2006. The CSDs are expected to sign legal agreements with the Eurosystem over the next few months and clearly need their own access channels to the Eurosystem for matters specific to CSDs. However, the users will ultimately pay for T2S’s services and accordingly wish to retain a voice equal to that of the CSDs in key matters including T2S strategy, scope and changes in the User Requirements Document. The continuation of an effective tri-party Advisory Group will be a major component in preserving users’ influence in T2S.

What impact do you expect T2S to have on your national financial markets and, from a broader perspective, on the European market infrastructure?

Göran Fors: If the Swedish market decides to join T2S, settlement will be centralised in T2S. The national CSDs need to be able to provide high quality services at reasonable prices, including within a T2S environment. Furthermore, competition between the users in the Swedish market will increase once T2S is operational.

Increased competition is likely to lead to lower prices for the end investor and the harmonisation of standards is likely to lead to the rationalisation of banks and brokers’ back offices.

At the European level, T2S will lead to increased competition in the provision of services related to securities settlement, namely at the level of trading (stock exchanges and multilateral trading facilities), clearing (central counterparties) and settlement (CSDs). Competition will also increase among users (banks and brokers). Another strong driving force will be the harmonisation of standards and processes across Europe. Increased competition is likely to lead to lower prices for the end investor and the harmonisation of standards is likely to lead to the rationalisation of banks and brokers’ back offices. This will reduce costs and, ultimately, lead to lower prices for the end investor.

If we can substantiate the commercial case and resolve issues surrounding governance now, T2S could reap the dividends for many years to come.

Henry Raschen: Past performance is no guide to the future, but I think London will continue to prosper as a financial centre with or without T2S. T2S will, however, give an extra dimension to securities processing which should help the UK market, especially if domestic settlement does indeed cost less than it would in the existing CSD. For Europe generally, however, T2S will have many advantages including harmonised practices, lower cross-border settlement costs, increased cross-border investment flows (subject to the wishes of investors) and more efficient use of collateral. If we can substantiate the commercial case and resolve issues surrounding governance now, T2S could reap the dividends for many years to come.