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When we first discussed T2S with market participants back in 2006, we mentioned that the system would possibly settle bonds only. The response from the market was: “If you want to add another platform to the 30 or so that already exist, we are not interested; but if you want to replace all European settlement platforms with a single one, then we are very interested.” This answer is very important: the business case for T2S is not just that it can offer cross-border settlement for the price of domestic settlement; it is also based on the economies of scale that T2S can generate.
The business case for T2S is not just that it can offer cross-border settlement for the price of domestic settlement; it is also based on the economies of scale that T2S can generate.
In 2010 the Programme Board clarified the future pricing policy for T2S on the basis of an estimate of the future costs and settlement volumes. The key element of this pricing policy is the commitment, validated by the Governing Council of the ECB, not to charge more than 15 cent per instruction. Such a fee is very low by European standards, precisely because it builds on the considerable economies of scale that T2S can achieve. Like many colleagues, I thought that only a few cent would need to be added by CSDs to cover connectivity, customer services and IT adjustment costs. It therefore seemed clear to us that, with T2S, the prices charged by CSDs would be lower than the lowest domestic fee currently paid by market participants to CSDs.
However, it has recently come to my attention that, in some countries, CSDs envisage charging the T2S fees “on top” of the current CSD fees, because IT experts claim that very little of the existing IT infrastructure of CSDs can be decommissioned. If IT experts win the day, the European IT infrastructure will not consolidate, even with T2S.
I have a lot of sympathy (in the etymological sense of “suffering together”) for CSDs, which are faced with the challenges posed by T2S. I understand that many CSDs will be overburdened for several years with legacy infrastructure that will become redundant by 2014/2015 when they join T2S. I also understand the reaction of smaller market participants with limited cross-border activities, who do not wish to pay higher CSD fees because of T2S, as well as that of the larger banks that will be directly connected to T2S, which refuse to pay for an IT infrastructure they will no longer use.
The recent announcement of the merger between Deutsche Börse and NYSE-Euronext proves that market infrastructures will lose their national character.
One should not ignore what the invisible hand will do! Markets that cling to the old ways of doing things and to the illusion that change is optional will find that their franchise disappears. In our sophisticated markets for financial assets, which have common regulatory and client pressures, the transition may be quite rapid.
The recent announcement of the merger between Deutsche Börse and NYSE-Euronext proves that market infrastructures will lose their national character. The future CSD regulation, the work that the T2S Advisory Group does to harmonise cross-CSD settlement, and T2S itself will all increase competition between CSDs. Some CSDs will quickly re-shape their IT infrastructure, possibly covering the redundant part of it by a “one-off” accounting loss, offering low prices to existing as well as new customers as early as 2014. New CSDs may also open, with non-negligible entry costs, but no legacy IT infrastructure at all. Other CSDs may wish to migrate as late as possible, maintain their legacy infrastructure and increase their prices. Guess what the invisible hand will do!
I have a lot of sympathy (in the etymological sense of “suffering together”) for CSDs, which are faced with the challenges posed by T2S.
My conclusion is very simple: from an economic and a business point of view, it will not be possible to charge the T2S fee on top of the present CSD fee. This does not mean that I intend to impose any business strategy on my CSD friends and colleagues. I would even understand it if some of them wanted to keep their existing IT infrastructure for a few years after the start of T2S. However, I am firmly convinced that increasing prices is not an option.
Later in this issue, Marc Bayle provides some interesting thoughts on concrete ways in which CSDs can re-shape their systems. As usual, Helmut Wacket provides an update on the project. You will also find two exclusive interviews: one with Jesus Benito (CEO of Iberclear) in his capacity as chairman of the task force on smooth cross-CSD settlement in T2S and one with Paolo Cittadini (CEO of Monte Titoli) on Monte Titoli’s strategy for adjusting to T2S. This edition of T2S OnLine closes by introducing the National User Groups and the important role they play in the T2S project.
I hope you enjoy this issue.
