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T2S will be a state-of-the-art settlement solution, providing core, neutral and borderless services to the whole of Europe to the benefit of all participants. It will offer delivery-versus-payment (DvP) settlement in central bank money in several European currencies. The Eurosystem will run T2S in accordance with the full cost-recovery principle. T2S revenues will be aimed at covering only the costs of developing and running T2S, and there will be no profit margin.
In line with the transparent approach which has always characterised the project, the T2S Programme Board shared the first preliminary figures regarding future T2S prices with market participants in the T2S Advisory Group at their meeting of 7/8 September 2010. This analysis shows that, given that securities settlement is largely a fixed-cost business, the geographical reach of T2S will have a major impact on T2S prices. Assuming that the central banks of Denmark, Sweden and Norway, which have indicated their interest, authorise settlement of their national currencies in T2S, the T2S solution could offer a DvP settlement price of 20 cent. If all of the 30 European central securities depositories (CSDs) that have signed the T2S Memorandum of Understanding join T2S, including the respective currencies, the fee for DvP settlement charged by T2S would amount to only 13 cent per settlement instruction. The end-price for DvP settlement to CSD customers will be the T2S fee plus the fees CSDs charge for their own additional services and communication charges. The size of these additional charges will depend on how CSDs reshape their own infrastructures.
It should be noted that these figures are very preliminary: T2S costs still require the approval of the Governing Council of the ECB, the T2S pricing structure is still being discussed with market participants, and estimates of future T2S settlement volumes are still being assessed by the T2S Programme Board and may therefore change over time.
A closer look at the evolution of cost assessments is needed in order to appreciate the challenges ahead and the preliminary nature of current estimates.
In 2008 the Eurosystem conducted the T2S Economic Impact Assessment to quantify the costs and benefits of T2S with the close involvement of market participants. The assessment concluded that the total T2S development costs would be €203 million and the annual maintenance and running costs between €65 million and €104 million, depending on the number of CSDs joining T2S. Using the settlement volume figures available at that time, the average T2S cost per settlement instruction was estimated to be between 21 cent and 57 cent. These calculations were based on an assumption that T2S had started operation in 2007 in order to allow a comparison of the figures with the CSD fees prevailing at the time of the study. In discussions with the market, it was established that at least 70% of T2S revenues would be generated by T2S settlement service fees and that the remaining 30% would be generated by other T2S services, e.g. T2S information services, such as queries concerning the status of instructions etc. Given these assumptions, the Chairman of the T2S Programme Board, Jean-Michel Godeffroy, indicated in 2008 that T2S was aiming for a settlement fee of no more than 15 cent per DvP settlement instruction when T2S goes live.
The dynamic environment of T2S has, however, brought about some changes in the assumptions underlying these calculations. First, market participants in the T2S Advisory Group would prefer a simple T2S pricing structure with fewer additional service items to be charged, rather than a low benchmark price. The DvP price will therefore have to cover more services which were initially planned to be charged separately. Second, market participants have asked the Eurosystem to provide additional services in T2S, and this has increased T2S costs. Third, the Eurosystem had to delay the going live of T2S by several months, which also contributed to a revision of costs. Fourth, European settlement volumes today are lower than expected. This is primarily due to the financial crisis, but also to the fact that the introduction of central counterparties (CCPs) has had a greater impact than CSDs had expected. Moreover, some CSDs have significantly revised their previously reported figures downwards.
Given these changes, the T2S Programme Board has reassessed T2S costs and pricing. It now expects costs of €256.4 million for the development of T2S, and €50.7 million on average per year during the running phase on the side of the four central banks which will develop the T2S business application and operate T2S (Deutsche Bundesbank, Banco de España, Banque de France, and Banca d’Italia – jointly referred to as the “4CB”). The costs on the side of the ECB, which supports the T2S Programme Board and coordinates the relations with internal and external stakeholders, are expected to amount to €90.2 million over the development phase and €9.3 million on average per year during the running phase. In addition, the T2S Programme Board currently calculates interest costs for the financing of T2S of €67.5 million and a contingency provision of €36 million to cover costs related to the maintenance of the system, minor changes, and potential liability claims etc. These costs are difficult to quantify at this stage. It should also be noted that the current T2S cost estimates are not directly comparable with the estimates published in 2008. For example, the annual running costs have declined, partly because the communication costs between CSDs and T2S are now treated separately. Furthermore, the additional volume generated if additional European CSDs join T2S will entail a lower cost increase than previously anticipated. At the same time, development costs have increased, mainly because of the changes in the scope and timing of T2S.
Despite the fact that the cost assumptions have changed, T2S fees will still be very low compared with today’s settlement fees, and the efficiency gains will be significant. The settlement fee reductions for cross-border business will be substantial (up to 90%) and the objective is to offer settlement fees that are lower than those currently found in any national market. In addition, the cost-benefit analysis conducted together with market participants in 2008 revealed that less than half of the expected annual T2S benefits would be generated from savings on CSD settlement fees, with the rest arising from the streamlining of back-office functions and collateral savings at the user level. Hence, the business case for T2S is very robust.
It is equally crucial to underline that the DvP settlement fee could even fall below 15 cent in a multi-currency T2S. Negotiations on participation in T2S are still ongoing, and contracts between the Eurosystem and CSDs, and between the Eurosystem and non-euro area central banks authorising settlement of their currency in T2S, are expected to be signed in the course of summer 2011. The more CSDs and currencies that join T2S, the greater will be the benefits in fee, back-office and collateral/liquidity savings for everyone (i.e. for all the CSDs, banks, investors and issuers in the participating markets).
The T2S Programme Board is continuing to refine its T2S cost and pricing estimates. It will further discuss them with market participants and will present a proposal to the Governing Council for a decision in early 2011.
For more information please also see the presentation delivered to the Advisory Group.
