Dinner speech: TARGET2-Securities meeting with market participants
Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB
Frankfurt am Main, 18 December 2006
Ladies and gentlemen,
It is a great pleasure for me to host this dinner tonight in Frankfurt. This two-day meeting represents a very good opportunity to share with you the ideas developed during the past 5 months.
This meeting with market players is one step further on the way to the Feasibility Study. The next step for January ahs been announced already. Our assessment is carried out in an open and transparent way and we want to create confidence that your views are adequately taken on board.
Tonight, I would like to address some of the conditions necessary for T2S to be a success. I would like to focus on the following:
First, I would like to underscore my commitment to the T2S project.
Second, I would like to stress how essential this project is for the European settlement landscape, and how promising the path leading to T2S is.
Third, I would like to highlight the importance of common work on this project.
“Post-trading” issues in the European setting are discussed for years now. What has actually been achieved so far? T2S is one of the many initiatives to foster the integration in post-trading infrastructure. It is not a political design, it is mainly a technical project. It shares the same objectives as other public initiatives in this field, most notably the Code of Conduct prepared by the European Commission. In fact, T2S and the Code of Conduct support each other mutually in the field of post-trading. The common objective of these two initiatives is to achieve higher efficiency and lower costs through greater competition.
The Code of Conduct pursues this objective through the self-commitment of CSDs to provide:
more interoperability among systems, and to
unbundle clearing and settlement services.
T2S on the other hand pursues the objective at the operational level, as explained to you earlier during the meeting.
The European Commission has stated its support for T2S from the very beginning, and the European Parliament has also concluded that “until such time as an [integrated settlement] infrastructure may have been introduced, an ECB governance must be put in place”. T2S can also be seen as supporting the Lisbon Agenda in modernising our economy in the face of increasingly global markets and technological change.
Let me now say something about the Eurosystem’s commitment towards this project.
Safe and efficient clearing and settlement systems are essential for the overall functioning of the financial market and for the conduct of central bank credit operations. For this reason, the Eurosystem considers it necessary to provide some incentive and leadership to overcome sectoral or national barriers to clearing and settlement. This is a traditional role for central banks in many countries and is deemed consistent with the mandate of the Eurosystem.
In the Eurosystem, we take the needs and demands of market participants– in this case, banks and CSDs - very seriously. We always attempt to cooperate actively with market players. I am told that, today, you had an intensive discussion. This appears to me as being a substantial next step towards a constructive interaction between the market participants and the Eurosystem.
Let me be quite candid about our intentions. T2S is not about the expansion of central bank operations. It is about integrating the capital markets in Europe. There are different paths towards an integrated capital market. Our proposed path is new and very promising. No other path and process is equally promising and at the same time challenging in terms of reducing barriers for cross-border securities settlement.
Of course, our path is also ambitious and it is the most visionary one. But hasn’t the European Union been developed out of visions?
Let me progress now to our proposal for the euro area settlement landscape.
I do not want to preach or to extol the virtues of an integrated financial market tonight.
I simply note that the euro area still lacks an efficient, integrated securities infrastructure that would support the operation of a single financial market.
So far, there has been considerable progress in integrating settlement systems at the national level, with the result that in most European countries, just one settlement platform for all types of securities is in operation.
This is unfortunately not the case for the cross-border integration of infrastructure, where progress has been slower. In fact, cross-border transactions remain expensive and inefficient.
This state of things is the result of the difficulty faced by independent organizations in coordinating solutions across multiple countries and involving many different participants.
The introduction of TARGET2 next year will make the inefficiencies described above more obvious. The operational efficiency generated by a single pool of liquidity that TARGET2 allows will not be fully exploited by market participants because of the panoply of interfaces required to access the many existing CSDs.
T2S should change the situation substantially. T2S will centralise only the information and functionality required for settling securities transactions. T2S will not subtract competences, it will provide a service – i.e. settlement - to CSDs, at fees calculated in accordance with the cost recovery principle. The CSDs will continue to be responsible for maintaining their relationships with intermediaries, investors and issuers.
How will this be achieved? Settlement is a standardized process - the securities accounts of multiple CSDs shall be maintained on a single technical platform alongside central bank cash accounts. On the other hand, the relations with intermediaries, investors and issuers are much more heterogeneous, so all the other functions exercised by a CSD will remain with them.
This separation of functions should allow to achieve relatively quickly an integration of the settlement process (in T2S) while allowing more time for the harmonization of local market practices (across CSDs).
The continuing role for CSDs in relation to intermediaries, investors and issuers means that there will continue to be choice and competition in the provision of services offered by CSDs.
If anything, T2S will increase the possibilities for choice and competition. Participants will be able to choose among many CSDs to access a common settlement engine.
Let me finally turn to the importance of working together.
Without the initial encouraging support received from the markets, we would not stand here today. When the intention of the Eurosystem to investigate an integrated settlement engine was announced, many details were not yet known. As the project progresses, more and more information becomes available, and we hope that any residual uncertainty will fade away over time, as market participants realise the substantial gains that can be made from an overall more efficient infrastructure.
Further integration of infrastructure is desirable and should be pursued, even if it involves changes that may affect individual institutions. Indeed, euro area central banks themselves are undergoing a process of transformation. They have outsourced some services to the private sector.
To give you an example, several printing works run by national central banks in the euro area have been fully transferred to the private sector - some central banks are not involved anymore in cash handling services, etc.
The idea of integrating the settlement part of the post-trading infrastructure is complex. But the complexity of the T2S project should neither be overemphasised nor should we underestimate risks and costs.
When you compare T2S with what over 6000 banks are currently undertaking in the context of the SEPA project, where the payments landscape of Europe is being fundamentally modernised, then the challenges of T2S appear to be manageable as well. We need to pursue the project seriously and constructively. We have to be successful. We owe this to the many potential clients of T2S, wherever they reside, in the €zone, in the UK, Sweden, Denmark, in the new member countries, in Switzerland or Norway as well as outside Europe.
The Eurosystem is conscious of the challenges posed by the project and intends to co-operate closely with those institutions willing to work together to make the project successful. Once the Governing Council has given green light and the T2S Blueprint is published for a public consultation, I sincerely hope that the Eurosystem and the CSDs will agree to sit around a table and find solutions for T2S while actively listening to the suggestions coming from the future users.
Let me close these few remarks tonight by wishing you a fruitful discussion at the second part of the meeting tomorrow. Use the opportunity now. Do raise all your concerns and queries.
Do mention any comments and doubts you may have. This will help us to focus on any issue requiring to be pondered further. I can promise you that we will endeavour to find answers to all the questions, just as we will address the questions from European Committees like the EFC and the FSC who prepare the Ecofin meetings and we will clearly respect our accountability duties vis-à-vis the European Parliament and the European public at large.