29 November 2010

Interview with Iwona Sroka and Adriana Tanasoiu

Ms Tanasoiu, Depozitarul Central S.A. was one of the first CSDs outside the euro area to show an interest in T2S. Why did you decide to join T2S so early on?

Depozitarul Central S.A. was among the first CSDs outside the euro area to realise that the T2S initiative could not be ignored and that it was important to understand at an early stage how to benefit from it.

Adriana Tanasoiu: Depozitarul Central S.A. was among the first CSDs outside the euro area to realise that the T2S initiative could not be ignored and that it was important to understand at an early stage how to benefit from it. Europe is approaching a key period in the delivery of a single integrated European capital market. T2S is just one element of a complex strategy designed to achieve efficiency and reduce risk in European clearing and settlement. Other elements include the Markets in Financial Instruments Directive, the European Code of Conduct for Clearing and Settlement, and other harmonisation initiatives aimed at removing the so-called “Giovannini barriers”. Things are changing rapidly in the post-trading world. As a leading institution in the market, we have a duty to deliver services for the long-term benefit of our clients – both domestic and international – by continuously enhancing efficiency and reducing the costs and risks for the market we serve, thus facilitating greater liquidity.

T2S will definitely change today’s business models in the post-trade environment, and, despite the threats that many perceive, we believe that it will bring opportunities and we are determined to capitalise on these.

Ms Sroka, KDPW was initially reluctant to join T2S. What has convinced you to sign the Memorandum of Understanding?

What actually convinced us to sign the Memorandum of Understanding was the sheer number of CSDs taking part in the T2S initiative, as well as the guarantee of a level playing field in T2S

Iwona Sroka: The reason for the initial reluctance on our part was a degree of caution in the face of a fundamental change to the securities settlement business and concerns that this change would lead to the marginalisation of small and medium-sized depositories, such as KDPW, within Europe. At the beginning it was difficult to assess the likely impact of the project and we spent some time observing its progress. What actually convinced us to sign the Memorandum of Understanding was the sheer number of CSDs taking part in the T2S initiative, as well as the guarantee of a level playing field in T2S; we were assured that the same settlement fee would stand for all CSDs in T2S (with no volume discount) and that the composition of fees with the share of fixed fees would not be detrimental to small and medium-sized CSDs. Taking into account our strategy of openness towards European integration (a priority of the new KDPW Management Board) it would not be appropriate to stand on the sidelines of a Europe-wide initiative engaging all other CSDs, just as it would be ill-advised to isolate the Polish market from international capital flows.

What are the strategic objectives of your institution? What part does T2S play in this respect?

Adriana Tanasoiu: Depozitarul Central S.A. has the capability and the desire to be a pioneer in the T2S process and to offer early advantages to our present and future clients, whether domestic or international. We have the adaptability and results necessary to increase post-trade market efficiency across asset classes for both domestic and international activities. We strongly believe that the ones who will reap the greatest benefits from T2S are those who are able to adapt at an early stage and offer a one-stop shop and value-added services to their domestic and international clients.

We are supporters of the various regulatory initiatives within the European Union intended to improve market efficiency and financial stability. In T2S, we see a unique opportunity for the public and private sector to shape together the future of our industry. We are in constant dialogue with the financial community via the Romanian National User Group, chaired by Depozitarul Central S.A.; this ensures that all possible concerns are flagged and addressed at an early stage.

We believe that T2S, by reducing costs and lowering the operational barriers to the cross-border settlement of securities transactions and corporate action processing, will encourage foreign investors to explore our market, providing Polish issuers with access to capital and strengthening the position of KDPW by providing interoperability with other CSDs.

Iwona Sroka: The new KDPW strategy has been formulated on the basis of the existing advantages of the Polish capital market, which is the biggest market in central and eastern Europe as regards GDP, market capitalisation and turnover. Given the fact that the Polish economy was the only one in Europe to withstand the last economic crisis, and given the current developments in the Polish market, as supported by the privatisation process (i.e. the initial public offering of big and sound companies, such as PZU, the insurance company; Tauron, the electrical power company; or the Warsaw Stock Exchange itself), the market has become more attractive to foreign investors as regards the depth of the capital market and the economy. Our objective is to use these advantages for the building of a regional financial centre in Warsaw and in order to become one of the principal depository institutions in central and eastern Europe. We believe that T2S, by reducing costs and lowering the operational barriers to the cross-border settlement of securities transactions and corporate action processing, will encourage foreign investors to explore our market, providing Polish issuers with access to capital and strengthening the position of KDPW by providing interoperability with other CSDs.

Where do you see the greatest benefits of T2S for your institution?

Adriana Tanasoiu: T2S will create a single, borderless pool of pan-European securities, as well as providing a core, state-of-the-art settlement process. Those that gain will be those who adjust very quickly to this new opportunity and are able to transmit the benefits to their customers. Depozitarul Central S.A. will have the possibility to offer settlement in T2S to its customers, opening up new business opportunities.

We expect to see increased volumes of cross-border activity, generated by more clients, who invest both domestically and internationally. Because we are building value-added services, we intend to provide our domestic and international clients with a one-stop shop, offering a complete range of easy-to-access post-trade services.

As a result of T2S, the European capital market will achieve a level of efficiency that today can only be found in domestic markets.

The savings in the settlement costs are expected to be passed on to end-investors, who will, in addition, be able to benefit from more diverse portfolios. Meanwhile, issuers will benefit a more diverse investor base. As a result of T2S, the European capital market will achieve a level of efficiency that today can only be found in domestic markets. Essentially, T2S will facilitate the evolution of the European capital market into a “domestic” market.

We expect to be a major point of entry into T2S, servicing all asset classes settled in T2S for our entire extended client base. And, with this in mind, we intend to focus on all collateral management-related products and services, for both equities and fixed-income securities, asset servicing and additional issuer services.

Iwona Sroka: As I said before, the greatest benefit for KDPW will be the possibility of offering access to cheaper cross-border settlement, as this would not only attract foreign investors to the Polish market but also give local investors access to attractive markets abroad, as well as improving the access of issuers to international capital. It is important for us to join this international initiative, which promises to increase the technical interoperability of KDPW with other CSDs and to help to introduce common European standards to our market, as well as to those markets with which we cooperate. These are very important features for us and we have initiated some changes to the Polish regulations that will enable us to sign the Framework Agreement. However, there are still some legal barriers, including regulations relating to omnibus accounts, outsourcing, professional secrecy and the examination of T2S Services, which may not be removed until the signing of the Framework Agreement. We are discussing these problems with the T2S Team and I hope we will find a solution soon.

Recently, the Eurosystem has presented the T2S pricing proposal of 15 cent per instruction for a DvP transaction. What is your assessment of this proposal?

Adriana Tanasoiu: As I mentioned earlier, one of the major objectives of T2S is to facilitate the evolution of the European capital market into a “domestic” market. In every business, investment is necessary if this business is to reap greater benefits. I view T2S in exactly the same manner. In order to create a seamless pan-European market, we need to invest. One of the expected benefits of T2S is the lower cost of cross-border settlement. As a result of the reduced cross-border settlement costs, increased competition and greater harmonisation, T2S is expected to produce incremental volumes and have a positive impact on European economic growth in general. As the settlement price in T2S will not have any discounts, having different connectivity prices will lead to different total costs per instruction among CSDs for their clients. To ensure the achievements and maintenance of an authentic level playing field between CSDs in T2S, we support the proposal, put forth at the Vienna AG meeting, to have equal costs for connectivity to T2S for all CSDs, irrespective of volumes and geography. Only once all the cost elements (including adaptation costs) are known, will we be able to make an assessment of the pricing proposal.

Iwona Sroka: T2S pricing is a crucial question for all the CSDs taking part in the project. The pricing proposal of 15 cent would sound attractive to us if it were the complete settlement fee. But we have to remember that the fee does not cover information services, communication through a network provider, maintenance fees or the inventory of other T2S service charges, the costs of which are not yet established. After the addition of all those elements, the cost of settlement will increase, but by how much remains to be seen and this gives us cause for concern. Moreover, KDPW, as well as other CSDs, has to bear the adaptation costs of our settlement system. The new highly automated IT system, with low requirements for human intervention, which was installed by KDPW in September 2009, was probably another reason for our reluctance to join the T2S project. With our system, the settlement costs for domestic trades are relatively low. Therefore, the added value of T2S is mainly in the area of cross-CSD settlement. Owing to the high rate of domestic trades currently conducted in Poland, low T2S settlement fees are very important for us from a business perspective.

The pricing proposal of 15 cent would sound attractive to us if it were the complete settlement fee.

We understand the difficulty for the Eurosystem in presenting a firm and complete pricing proposal at this point in time, taking into account the cost-recovery principle, the long-term horizon of the project and uncertainty regarding settlement volumes. Without a doubt, it must be a real challenge to manage a project as complex as the T2S project, in which all parties involved have many diverse interests. We are really impressed by the T2S Team’s ability to deal with such complexity. Taking all of this into account, it seems that one of the ways to establish a lower settlement fee is to have more markets from outside the euro area signing the Framework Agreement to join T2S with their currencies. We also believe that in the long run, once the cost-recovery period has ended, the settlement fee will be significantly cheaper than that currently proposed.

How do you assess the possibility of participation of your local currency in T2S?

Adriana Tanasoiu: The T2S Romanian National User Group will analyse the possibility of making the Romanian leu available in T2S. Any future participation of Romanian leu in T2S is subject to approval by the Banca Naționalǎ a României, but first, the financial community must be confident of the benefits. We are going to discuss this issue at one of the next meetings of the Romanian National User Group, and a final position on the issue will be taken once the analysis is complete and all implications have been clarified.

We will continue discussions with our participants regarding the ultimate consequences of participating in the T2S platform with the Polish zloty, but currently, the preference is to join T2S only with euro-denominated financial instruments.

Iwona Sroka: Participation of the Polish zloty in T2S is currently the subject of debate in the Polish National User Group. We started to talk to our participants in September as regards this issue. One has to remember that, unlike the Scandinavian countries, which have already declared their interest in settling securities transactions in their local currencies, Poland plans to join the euro area in the foreseeable future, although no firm date has yet been declared and accession will probably happen no sooner than in 2016-17. Declaration of participation of the Polish currency in T2S would, therefore, cause Narodowy Bank Polski to bear the cost of developing an interface that would be used for Polish zloty settlements for a rather limited period of time only. From this perspective, this solution does not seem to be optimal for the Polish market. We will continue discussions with our participants regarding the ultimate consequences of participating in the T2S platform with the Polish zloty, but currently, the preference is to join T2S only with euro-denominated financial instruments. However, there is still hope that Poland will join the euro area in the year 2016.