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Effective, balanced and transparent governance is instrumental in providing safe and efficient post-trading services, and T2S is no exception. Following extensive discussions with all of the relevant stakeholders, consensus has been reached on how T2S should be governed for the rest of the development phase and once it is in operation. The future T2S governance forms the backbone of the contractual agreements with CSDs. These Framework Agreements represent a major milestone in the history of T2S, as highlighted in the Editorial of this issue of T2S OnLine. The key principles for steering T2S in the future are set out in dedicated parts of the Framework Agreements, while the underlying philosophy pervades the Agreements. The rules on governance will apply equally to contracts with non-euro area central banks willing to participate in T2S (Currency Participation Agreements).
The future T2S governance forms the backbone of the contractual agreements with CSDs.
It is no secret that finding a solution for T2S governance has been difficult at times. The political and business interests of the stakeholders, as well as their legal and regulatory constraints, always culminate in the issue of governance. T2S has four strong stakeholder groups (the Eurosystem, non-euro area central banks, CSDs and their users), which all have well-justified interests and objectives. The negotiations have not been made easier by the diverging interests that can exist even within a single T2S stakeholder group.
Of course, T2S has benefited from a clear governance structure based on transparency, market involvement and consensus as key pillars since its early days. This governance structure has ensured the steady progress of the project and was initially established by the Eurosystem. However, the signing of the Framework Agreements and the Currency Participation Agreements requires a more formal and codified involvement of the Eurosystem’s contractual partners and the new governance arrangement has therefore been a key subject of negotiation for long. With the conclusion of the negotiations with CSDs and non-euro area central banks, and the recent decision by the Governing Council, the future T2S governance has now been agreed. Here we take a brief look at how T2S governance has evolved, before highlighting recent achievements.
When the idea of T2S was born in 2006, the Eurosystem initiated tri-party meetings with CSDs and the user community. These informal meetings were soon superseded by the T2S Advisory Group (AG), which was established in 2007. The AG and its technical sub-groups were instrumental in (but certainly not limited to) the development of the T2S User Requirements Document and the decision by the ECB’s Governing Council to launch the T2S project in 2008.
In April 2009, keeping the AG as an advisory body, the Governing Council established the T2S Programme Board as a streamlined Eurosystem management body for T2S, which includes independent members and non-euro area central bankers. Since then, 30 European CSDs have signed the Memorandum of Understanding, which was the basis for the contractual negotiations on the Framework Agreement with the Eurosystem in a dedicated body called the CSD Contact Group.
30 European CSDs have signed the Memorandum of Understanding, which was the basis for the contractual negotiations on the Framework Agreement with the Eurosystem in a dedicated body called the CSD Contact Group.
In parallel, several non-euro area central banks expressed their interest in outsourcing their currency to T2S and – in a dedicated task force together with the Eurosystem – have completed preparations for the Currency Participation Agreement. These discussions, as well as the advice of the AG, have led to the future T2S governance framework.
Since 2006 the degree of market involvement and transparency has been without precedent for a Eurosystem project as well as for the post-trade industry as a whole. This has been essential for market acceptance and the progress made on T2S.
Throughout the negotiation process, the Eurosystem has emphasised market involvement, transparency and consensus as the key pillars underlying any possible future T2S governance to ensure that T2S will continue to meet the evolving needs of the market.
The Eurosystem has emphasised market involvement, transparency and consensus as the key pillars underlying any possible future T2S governance to ensure that T2S will continue to meet the evolving needs of the market.
Although immovable on these key pillars, the Eurosystem has shown a lot more flexibility in other areas. For example, in early 2009 several market participants in the AG asked a task force to explore the possibility of establishing a separate legal entity for T2S. Even if ultimately there was only limited support for this option in the market, the task force discussions fostered a better understanding of the concerns of the various stakeholders. Jean-Michel Godeffroy summarised the main concerns of the three main non-Eurosystem stakeholder groups in his T2S OnLine Editorial in July 2010. Together the Eurosystem and the stakeholders have successfully found solutions to the concerns that were raised at that time.
Each T2S stakeholder will have the level of control necessary to pursue its commercial and policy objectives and to comply with legal and regulatory requirements. Final decisions on changes to T2S and other relevant matters will follow a transparent and consensus-driven process, in which all stakeholder groups will have a say. Should consensus between the different groups not be reached initially, a reconciliation process will start: the matter will be reassessed at the technical level and then reconsidered at the steering level. This may be a repetitive process and external advice may be sought, until the ECB’s Governing Council takes a final decision. The entire decision-making process will continue to be transparent and relevant decisions will be explained publicly.
The overall management of T2S will be performed by the T2S Board as the successor body of the T2S Programme Board. The shortening of the name reflects that the Board’s responsibilities now not only include the delivery of the T2S Programme, but also the smooth operation of T2S after its go-live. Thus, the Board’s role as the key management body for T2S will remain basically unchanged.
CSDs will have full control over the operation of the securities accounts. As contractual partners of the Eurosystem, they will be strongly involved in the decision-making process via the CSD Steering Group (CSG), which will be chaired by a CSD member (until now the Chairman of the Programme Board has also chaired the CSD Contact Group). CSDs are expected to continue to contribute to the success of T2S in an even more prominent role in the T2S governance than in the past.
Users will keep their role in the AG, which will continue to be chaired by the Chairman of the T2S Board, and will be able to participate as observers in the CSG and relevant technical groups. They will be involved in the relevant T2S decisions to ensure that T2S meets the needs of the market.
The future governance framework for T2S represents a fair balance between the diverging interests of the relevant stakeholders, and is built on the pillars of transparency, market involvement and consensus.
The new T2S governance also underlines explicitly the multi-currency character of T2S through the principle that all currencies in T2S are handled on an equal basis: for example, all central banks, Eurosystem and non-euro area central banks will have full and exclusive authority to operate the cash accounts in their currency; non-euro area central banks will be granted fair representation in the successor to the T2S Programme Board – the T2S Board; and a new body, the Governors’ Forum, will allow non-euro area central bank governors to meet their Eurosystem peers at an equal level and in equal number to find a consensual solution in the very unlikely event that a controversial issue related to T2S could not be solved at a lower level.
The future governance framework for T2S represents a fair balance between the diverging interests of the relevant stakeholders, and is built on the pillars of transparency, market involvement and consensus. Given that T2S is a multilateral arrangement, all stakeholders needed to make concessions compared with the situation if they were on their own. However, such concessions have been finely balanced and they have been made for the benefit of market participants in Europe and for the European integration of capital markets.
